• City Developments posted a record 1H profit, boosted by one-off items, while operating PATMI was broadly in line. Management’s strategy of extracting value from its non-core assets is beginning to bear fruit, with positive impact to NAV and bottomline.
• Outlook is positive for 2H as City Developments has healthy unbilled residential sales, and a strong recovery is seen for its hotel and investment portfolio.
• Valuation is cheap, in our view, with City Developments's share price trading at > 50% discount to its RNAV.

City Development Reported Record 1H Net Profit of S$1.1bn

• City Developments (SGX:C09) reported record 1H net profit of S$1.1bn, boosted by divestment gains from the sale of Millennium Hotel Seoul (S$526m) and accounting deconsolidation (S$492.4m) of CDL Hospitality Trusts (SGX:J85). Excluding the above, 1H operating PATMI stood at S$110.3m (vs a loss of S$32m in 1H21).
• We expect City Developments's operating PATMI to double in 2H on the back of higher contributions from residential segment and strong recovery in hotel operations. City Developments is also expected to recognise further gains to the tune of ~S$250m from the sale of its stakes in Tanglin Shopping centre and Golden Mile Complex.
• City Developments announced an interim dividend of S$0.12 per share for 1H22 (vs S$0.03 previously in 1H21).

Hotel Segment Staging a Strong Recovery

• Hotel operations reversed into black in 1H with all markets registering positive EBITDA. A stronger performance is expected in 2H. Global RevPAR rose 110% y-o-y (driven by room rates, +53%) which returned to pre-COVID-19 levels on the back of a strong pent-up leisure travel demand.
• Post strategic review of its Millennium & Copthorne portfolio, City Developments categorized its assets into:
  • Core assets with focus on operational efficiency;
  • assets earmarked for asset enhancements;
  • redevelopments; and
  • divestments.
• We expect more value unlocking moves ahead from its hotel portfolio.

Good Earnings Visibility From Healthy Unbilled Residential Sales

• Take-up rates at City Developments’s Singapore residential launches have been strong with only ~10% of its launched inventory remaining unsold. We estimate unbilled residential sales (with JV projects) of ~S$5bn to provide strong earnings visibility for the next two years. It also has a launch pipeline of > 2,000 units in Singapore for which we continue to expect resilient demand.
• Growing in scale on living sector portfolio with the acquisition of three newly-built Private Rented Sector (PRS) projects in Japan, a freehold site in Melbourne (to be developed into 240 units PRS), and its maiden first Purpose-Built Student Accommodation (PBSA) in the UK. These assets are expected to form a pipeline for CDL Hospitality Trusts and help in achieving its 2023 fund management target of S$5bn.

No Changes to Core PATMI Forecast

• ESG score of 3.3 (out of 4.0), based on our in-house methodology. As the ESG score is three notches above our country median, we applied a 6% premium to our target price for City Developments.
• Maintain BUY recommendation on City Developments with S$9.75 target price, 18% upside and ~2% yield.

Source: RHB Invest Research - 12 Aug 2022