City Development (City Dev) announced the divestment of Millennium Hilton Seoul and adjoining land to IGIS Asset Management for KRW 1.1tn (c. S$1.26b)

Key details of the divestment:

  • Divestment priced at KRW 1.1tn (c.S$1.26b) is KRW835.17b (c.S$960.4m) over the Group’s net book value as at 30 Nov 2021.
  • Expected gain of S$529.73m, net of taxes and related transaction costs. City Dev acquired  the hotel in Nov 1999 and the adjoining 1,563.7 sqm freehold land plot in 2013 for US$213.5m (c.S$290m) and KRW 29.5b (c.S$34.2m) respectively.
  • Proposed transaction will improve RNAV gearing as at 30 Sep 2021 to 58% from 66%. Based on our ballpark estimates, net gearing (based on book value) could improve to c.0.9x vs c.1x as at June 2022.
  • Estimated completion of the transaction by 28 Feb 2022
  • Based on our ballpark estimates, the divestment could improve NAV by c.S$0.60 per share, based on the gains. As such NAV per share should improve to S$.9.81 vs S$9.22 as at June 2022
  • Based on the announcement, the performance of Millennium Hilton Seoul has been trending negatively over the years and was further exacerbated by the COVID-19 pandemic since 2020. As such, City Dev believes that the divestment at a significant premium to book value is an opportunity for the group to unlock the value of its portfolio.

Our Views
Although the divestment of Millennium Hilton Seoul and the adjoining land is the fourth hotel divestment of the M&C portfolio, this is the first significant divestment (realising a good significant gains) following from its portfolio optimisation strategy since the privatisation of M&C portfolio. We believe this is a positive step towards more unlocking of value of M&C portfolio’s non-core assets especially as travel progressively resumes and countries are slowly reopening their borders.

We believe that there is still more room to unlock value of M&C portfolio either via divestments or redevelopment. We believe that if the pace of unlocking value of M&C and recycling into more redevelopment projects within the group could pick-up, City Dev could deliver a steady stream of capital gains in the medium-term thus building more investor confident in its asset recycling strategy and earnings visibility.

We maintain our BUY rating on City Dev, TP of S$10.50. Aside from gains from unlocking potential of M&C portfolio as one of the key catalyst, we believe other streams of earnings recovery for City Dev includes i) the redevelopment potential from Singapore commercial assets (Fuji Xerox, Central Mall / Central Square), ii) upward trend of Singapore residential with strong sales volume, iii) earnings recovery especially from hospitality segment.

City Dev is currently trading at 0.77x P/NAV (based on NAV as at June 2021) or 0.72x P/NAV (based on pro forma NAV post divestment), close to its historical trough levels.