City Developments (CityDev) shares hit a 3-week high on Tuesday (Dec 14), after the property developer announced plans to divest Millennium Hilton Seoul. According to Business Times, CityDev indirect wholly-owned subsidiary on Friday (Dec 10) entered a sale and purchase agreement to sell the South Korea hotel and its adjoining land plot in South Korea for 1.1 trillion won (S$1.26 billion).

The proposed sale, along with the adjoining land plot, marks CityDev’s fourth hotel divestment of the Millennium & Copthorne Hotels portfolio since its privatisation and the largest hotel divestment to date. Will CityDev shares continue to see upside? 

Here is an excerpt of the Macquarie Research (MQ) research note published on 13 Dec 2021: 

Long-awaited sale of Millennium Hilton Seoul unveiled

•    The divestment price of Won1.1tn (S$1.26bn) is broadly in line with media reports for a sale around Won1tn. The divestment will generate sizeable net gains of S$0.58 per share in 1Q22. 

•    While the sales proceeds will be used to deleverage its balance sheet, MQ see scope for further capital management given the large divestment gain. MQ believe a one-off special DPS or restart of its share buyback programme will be well-received by the market.

Impact 

• Sizeable gain on sale. CityDev will sell Millennium Hilton Seoul and an adjoining land plot for Won1.1tn (S$1.26bn) to IGIS Asset Management. The divestment is a sizeable S$960m premium over its latest book value and will generate net gains of S$530m after accounting for taxes and related transaction costs. The deal is expected to complete by 28 Feb 2022. 

• Special DPS or share buyback… why not both? MQ believe the sizeable divestment should allow CityDev to embark on shareholder friendly capital management initiatives. It could announce a one-off special dividend to reflect the exceptional gain or restart its share buyback programme given the steeply discounted stock price. MQ believe a meaningful share buyback programme will be well-received by the market as evidenced by the substantial 31% rally in Hongkong Land since the announcement of its share buyback programme on 6 Sept 2021. 

• Best proxy to strengthening residential market. Beyond this well anticipated divestment, CityDev is also a beneficiary of the strengthening Singapore residential market. Home prices are on the rise and management has delivered solid sales at the recent launch of Canninghill Piers.

Earnings and target price revision

• MQ raise 2022/23E EPS by 128%/2% to incorporate the sale. MQ lift TP by 3.7% to S$9.90, on unchanged 45% discount to revised Revalued Net Asset Value (RNAV) of S$17.99.

Price catalyst

• 12-month price target: S$9.90 based on a RNAV methodology.
• Catalyst: Special DPS or share buyback; Singapore residential rebound.

Action and recommendation

• Outperform. CityDev is one of MQ’s top sector picks in 2022E. MQ see capital management from value unlocking moves and a strengthening residential market driving a rerating of the stock in the year ahead.

Note: Macquarie Research is independent from the Warrants business, what the Macquarie Warrants desks quote from Macquarie Research may not reflect the complete analysis of Macquarie Research on the relevant company over time.