9M19 Results Impacted by Impairment Losses and Privatisation Costs; Mitigated by Divestments Gains Recorded Earlier in the Year

• CITY DEVELOPMENTS (SGX:C09)’s 9M19 net profit fell marginally by 0.5% y-o-y to S$477m largely impacted by impairment losses of S$36.9m for Millennium Hilton New York One UN Plaza and Millennium Hilton Seoul and M&C privatisation costs of S$24mn, mitigated by the divestment gains of assets from PPS2 (Manulife Centre – S$153.9m and 7&9 Tampines Grande – S$43.3m) recognised in 1H19.
• Excluding the impairment losses and privatisation costs, 9M19 net profit would have increased 8.9% y-o-y.
• 3Q19 net profit fell 34% y-o-y to S$115m mainly due to lower contributions from property development (profit before tax (PBT) -32% y-o-y) attributable to the timing of profit recognition for development properties and hotel segment due to impairment losses and privatisation costs (loss before tax (LBT) of S$28m vs PBT of S$37m in 3Q18).
• Excluding the impairment losses and privatisation costs, 3Q19 net profit would have declined by 11.4% y-o-y.

• 9M19 revenue and PBT fell 55% y-o-y and 43% y-o-y respectively mainly due the absence of lump sum recognition in 9M18 including;
  1. The Criterion EC upon completion in February 2018,
  2. New Futura and Gramercy Park which has completed,
  3. overseas projects such as HLCC and Park Court Aoyama.
• PBT margins have expanded to 36% vs 28% in 9M18 as a result of lower margins from The Criterion EC. 3Q19 PBT margins expanded marginally to 38% vs 35% in 3Q18.

• 9M19 revenue was flat y-o-y but PBT fell 98% y-o-y impacted by S$36.9m impairment losses for Millennium Hilton New York One UN Plaza and Millennium Hilton Seoul, M&C privatisation costs of S$24mn and closure of Mayfair hotel for refurbishment in July 2018 which was re-opened on 9 September 2019 (YTD operating loss of S$13m).

• 9M19 revenue was +25% y-o-y mainly led by new acquisitions of three buildings in 1H18, namely Aldgate House (London), 125 Old Broad Street (London) and Central Mall Office Tower. PBT was S$298m in 9M19 vs S$131m in 9M18 supported by higher divestment gains.

Outlook

• 9M19 property sales reached S$2.56bn (+64% increase in sales value), with the group and associates achieving a 44% y-o-y increase in units sold to 1,130 units.
• The group launched six projects in 2019 (five 9M19 and one in 4Q with strong pre-sales rates across its projects. Its key projects –
  1. Boulevard 88 (83 units sold out of 154 units at S$3,800 psf),
  2. Amber Park (188 units out of 592 at S$2,480psf,
  3. Haus on Handy (30 units sold out of 188 total units at S$2,870psf),
  4. 444 units out of 820 units for Piermont Grand EC at S$1,080psf,
  5. 24 out of 30 released of the 156-unit Novel 18 at s$3,450pf where a majority of the units are leased out.
• In November, the group launched and sold 232 units out of the 680-unit Sengkang Grand Residences, a joint venture (JV) project, at average selling price of S$1,700psf.
• Launch pipeline stood at 1,515 units (accounting for the group’s effective share) with upcoming launches expected in 2020 including the Sims Drive (560 units) site in 1Q20.

• In Singapore, City Developments’s office and retail properties remain stable with occupancies at 91.3% and 94.2% respectively (vs 92.1% and 95.1% respectively in 2Q19 vs 91.4% and 95.8% respectively in 1Q19).
• Following the completion of the asset enhancement initiative (AEI) at Republic Plaza, rents were >10% higher than pre-AEI rents. City Developments’s management expects positive rental reversions to continue.
• As such, City Developments continues to undertake AEI opportunities with the next planned upgrading works at City Industrial Building.

• M&C’s revenue per available room (RevPAR) was +4.3% y-o-y in 3Q19 to S$156.8/night mainly on the back of higher rates achieved (+4.1%) while occupancy rate remain stable at 77.3%.
• The better performance was mainly driven by its hotels in Asia, especially Singapore (+14.9%) and rest of Asia (+9.2%) while its hotels in Europe (+1.6%) and USA (+1.4%) remained stable.
• On a YTD basis , portfolio RevPAR was 1.6% higher y-o-y to S$142.3/night.

• PPS3 – soft re-launch of 156-unit Nouvel 18 on 18 July 2019 at average selling price (ASP) of > S$3,450 psf. Sold 15% of total units.
• City Developments has successfully obtained its Capital Markets Services (CMS) licence from the Monetary Authority of Singapore (MAS) which paves the way for the company to set up a private fund and/or REIT and accelerate its fund management plans.
• Click on view full report button below for complete analysis.

Valuations

• Our Target Price is revised to S$13.00 from S$11.00 previously, based on a lower 18% (30% previously) discount to RNAV, which implies 1.08x 2020F P/NAV at 0.5SD above the historical average.

Source: DBS Research - 2 Jan 2020