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Felicia Tan Published on Wed, Sep 22, 2021

PhillipCapital has re-initiated coverage on City Developments Limited on Sept 20 with a “buy” call and a target price of $9.19.

According to analyst Natalie Ong, the counter is trading at an attractive 49% discount to the brokerage’s revised net asset value (RNAV) per share of $14.14.

“Asset monetisation and faster-than-expected recovery in hospitality portfolio are potential catalysts for CDL while recent asset enhancement initiatives (AEIs) and redevelopments should strengthen income stream and portfolio,” she writes.

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To Ong, there are several upsides to CDL, including its strong development pipeline that could catch Singapore’s property upcycle.

Year to date, CDL has picked up two plots of land, being the Northumberland Road government land sale (GLS) and the Tengah Gardens executive condominium (EC) site.

CDL also has a pipeline of 1,121 units that’re not launched yet. The units include the residential units from its redevelopment projects, Canninghill Piers (Liang Court) and Fuji Xerox.

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“Based on our forecasts, these two redevelopment projects should yield CDL respectable margins above 30%. Including the unsold units from earlier launches, we estimate that CDL has 1,746 units to be monetised, translating to FY2022/2023 gross development value (GDV) of $2.1 billion/$1.0 billion,” says Ong.

The impending recovery of the hospitality sector is another factor to look forward to, with revenue for CDL’s hotel segment expected to improve alongside the sector.

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Furthermore, CDL’s cost containment initiatives to reduce the duplication of roles and digitalisation efforts to lower manning costs should help improve margins.

“Keeping our forecast conservative, we projected 20% revenue CAGR for FY2021-FY2025. We expect the segment to turn net property income (NPI) positive by 2024, before recovering to pre-pandemic levels in 2025,” writes Ong.

Finally, the listing of CDL’s UK commercial Singapore REIT (S-REIT) could help improve the group’s balance sheet.

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“Assuming a 20-25% stake for CDL, the injection of 125 Old Broad Street and Aldgate House into a 38%-geared $3.5 billion S-REIT portfolio could unlock $526 million – $633 million for the group.”

In a Sept 17 report, RHB Group Research analyst Vijay Natarajan has kept “buy” on CDL with a target price of $8.50.

To him, CDL’s complete exit in Sincere Property Group is a “positive move”.

The move now allows CDL’s management to refocus on its key strengths, namely the Singapore market and its hospitality business.

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The exit will also enable CDL to avoid being engaged in a long-drawn bankruptcy reorganisation of Sincere, and protects the group from the future guarantees of litigations against Sincere from its creditors.

On this, Natarajan has estimated the fair value of the 10% stake added in Shenzhen Technology Park to be $30 million, which will be adjusted against Sincere’s current carrying value of $117 million in CDL’s books (which are mainly in the form of debt instruments).

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“[CDL’s] valuation is fairly cheap – the stock is trading at 25%/55% discounts to book value and RNAV, at -1 standard deviation (s.d.) from its long-term average,” he writes.

CDL’s acquisitions of the two residential sites is a “right step” to take, according to Natarajan. This is considering the group’s “strong track record, brand presence, strong residential momentum and falling supply levels in Singapore”.

CDL’s launch of Canninghill Piers in 4Q2021 is also expected to do well due to the lack of new launches in the area.

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To Natarajan, its hospitality business remains the wild card, with its hotel operations remaining impacted by the Covid-19 pandemic with an EBITDA loss of $47 million for the 1HFY2021.

“However, we concur with management view that there has been a strong build-up of pent-up demand for the sector, and a potentially strong recovery is expected, once Covid-19 headwinds subside – which may come in 2023,” he says.

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“With signs of vaccination rates picking up globally, a potentially faster-than-expected transition to the endemic stage and return of travel could be a key re-rating catalyst for the stock.”

As at 2.16pm, shares in CDL are trading 11 cents lower or 1.53% down at $7.07, or an FY2021 P/B of 0.7 times and a dividend yield of 1.4%, according to PhillipCapital’s estimates.

Photo: CDLHT