City Developments Limited: A fruitful year of successful landbanking March 5, 2018

PSR Recommendation: ACCUMULATEStatus: MaintainedTarget Price: SGD13.40
  • FY17 revenue and adjusted earnings in line with forecast.
  • Continued healthy uptake for launched local residential properties.
  • Successful land acquisitions to capitalise on the Singapore residential market upcycle.
  • Recovery in hotel operations with 3.2% YoY global RevPAR growth, in constant currency for FY17.
  • Strong cash reserves to capitalise on opportunities locally and abroad.
  • Maintain ACCUMULATE with higher TP of S$13.4 (based on 15% discount to RNAV).

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The Positives

+ Continued healthy uptake for launched local residential properties. On the back of a 36% increase in total transaction volumes across the island in 2017, CDL achieved a 55% YoY jump in residential home sales value sold for 2017. This is despite the absence of any new residential launch for CDL in FY17.

+ Successful land acquisitions to capitalise on the Singapore residential market upcycle. The buoyant sales have led to a healthy drawdown of residential inventory, with 178 units remaining for sale as at end FY17. The Group’s 4 successful site acquisitions since 2017, Tampines Ave 10/Handy Road/West Coast Vale/Amber Park will boost total inventory in the pipeline to 2,750 residential units.

+ Recovery in hotel operations with 3.2% YoY global RevPAR growth, in constant currency for FY17. This compares with the 2.3% YoY drop for FY16. Strength in global RevPAR growth was led by better occupancies and ADRs for US and European hotels.

+ Strong cash reserves to capitalise on opportunities locally and abroad. CDL’s net gearing ratio of 9% at end FY17 is the lowest for the Group on record. The strong cash reserves of S$4bn will allow the Group to capitalise on attractive opportunities globally.

The Negatives

– Slowdown in overseas residential sales especially in China. Sales in the Group’s largest development in China, Hong Leong City Centre (HLCC) slowed YoY in FY17 with 348 units sold, from 535 in the previous year. This is possibly as a result of a slowdown in momentum after the initial launch of the project phases and ongoing cooling measures in the country and. Nonetheless, the project is still a healthy 86% sold, with total sales in HLCC to date amounting to RMB 3.53bn.

Outlook

The outlook for CDL’s residential segment is improved following the successful acquisitions of 4 sites since 2017, in view of the Group’s dwindling inventory. Catalysts for share price could come from strong launches for The Tapestry, in Tampines (March 2018) and South Beach Residences (2Q/3Q18), which would test both the mass market and high-end segments. Global tourism is on the rebound as evident from the sustained RevPAR recovery for the Group into January 2018 at 3.6% YoY. The Group’s new route map to a US$5bn target AUM for the Fund Management segment by 2023 will create a new business division and revenue stream for the Group which will improve ROE in the medium term.

Maintain ACCUMULATE with higher TP of S$13.40.

We roll our forecasts forward to FY18e and adjust our ASP assumptions for SG residential projects upwards by 5-10% in view of the upcycle in prices which is already taking place for primary and secondary transactions. Our RNAV-derived target price is corresponding increased to S$13.4 (from $12.10), representing 1.29x FY18e P/NAV, still below the +1S.D. level of 1.48 since post-GFC.

Valuations

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Figure 2: CDL trades at slightly above post-GFC average P/NAV of 1.22

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About the author

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Tan Dehong
Investment Analyst
Phillip Securities Research Pte Ltd

Dehong covers primarily the REITs and property developer sector. He has close to 7 years experience in equities related dealing and research roles.

He graduated with a Masters of Science in Applied Finance from SMU and Bachelors of Accountancy from NTU.

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