• While City Developments’ portfolio faces near-term headwinds, we believe most of the negatives are fully priced in, with the stock trading closer to -2SD levels in P/BV and P/RNAV terms, and below Global Financial Crisis lows.
• The slow but steady recurring income build-up, strong balance sheet, and brand name, coupled with an experienced management team, should help City Developments emerge stronger from the crisis.
• Upgrade BUY from Neutral with new SGD9.50 Target Price from SGD10.50, 24% upside.

CDL’s Hospitality Portfolio Has Been the Hard Hit

• City Developments (SGX:C09)’s hospitality portfolio (16% of FY19 EBITDA) has been the hard hit, with nearly half of Millennium & Copthorne Hotels’ global portfolio of 152 hotels still closed. 1Q portfolio revenue/available room dropped 27% y-o-y, and is expected to fall sharply in 2Q, given worsening global conditions.
• City Developments has taken various steps to contain costs – including pay cuts of up to 30% and trimming headcount by 8%. While the near-term outlook for the hotel sector remains gloomy, we believe the cost containment measures and targeted capex should position City Developments well for a potential rebound in 2021.

Outperforming Peers in Terms of Residential Project Sales

• Despite a challenging Singapore residential market, City Developments has outperformed peers with a 40% and 49% increase in unit sales and sales value in 2019. The group currently has an unsold inventory of 1,476 units and another 1,800 in the launch pipeline.
• While near-term sales and prices are expected to face pressures, the recent 6-month extension of additional buyer’s stamp duty deadline has provided temporary relief. Additionally, the strong brand name and good project attributes should help mitigate the overall impact.

Increased Stakes in Sincere Property and IREIT Global Diversifies Income Stream

• City Developments announced a revised CNY4.4bn (SGD0.9bn) 51% stake acquisition in Sincere and call option to acquire an additional 9% in FY22 for CNY0.8bn. The revised deal is significantly better to its initial announcement of a 24% stake for CNY5.5bn last year and is valued based on an attractive 0.5x of Sincere’s FY19 NAV.
• City Developments also lifted its IREIT Global (SGX:UD1U) (BUY, Target Price: SGD 0.83, see report: IREIT Global - RHB Invest 2020-05-21: Proactive Lease Management; Keep BUY) stake to 20.9% from 12.5% after acquiring additional stakes at SGD0.49/share, a 42% discount to book value. IREIT Global is also highlighted as one of RHB's Top Singapore Small Cap Companies - 20 Jewels 2020 Edition. These recent acquisitions show management’s confidence and commitment to long-term investment plans.
• City Developments's net gearing stands at 0.44x, including fair value gains (excluding: -0.62x), with a healthy interest cover of 6.2x. RNAV accretion from Sincere is not factored in yet, as the deal is pending completion.

Earnings and Target Price Changes

• We have revised our FY20F-21F earnings by 18-28%, factoring in sharply lower income from the hotel segment and deferment of residential sales. Our RNAV discount is also raised to 45% from 40% to factor in higher risks.

Source: RHB Invest Research - 28 May 2020