2021: Recovery In Hotel Earnings Likely To Continue Into 2022
CDL swung back to profitability in 2021, reporting PATMI of S$98m post its Sincere misadventure which dragged down 2020 numbers. The key positives from the result were the hotel segment’s earnings recovery and a S$0.311 distribution for 2021 which includes a distribution in specie of units in CDLHT to its shareholders. Maintain BUY. Target price upgraded to S$9.20
RESULTS
• Back in black. City Developments (CDL) reported a 25% increase in revenue to S$2.6b while at the PATMI level, the company swung back to profitability after its Sincere misadventure in 2020. Nevertheless the company missed our and consensus’ estimates due to slightly lower-than-expected revenue and higher-than-expected costs. One of the main highlights of the result was the hotel segment’s return to profitability in 2H21, with management reiterating during the analyst briefing its strong belief that the hospitality sector will imminently rebound.
• Distributions aplenty. CDL proposed a final cash dividend of S$0.09/share, comprising a S$0.08 ordinary and a S$0.01 special dividend, as well as a distribution in specie (DIS) of CDL Hospitality Trust (CDLHT) units valued at S$0.191/share. Together with the interim dividend of S$0.03, this would result in a total distribution of S$0.311/share for 2021.
• Continued recovery in hotels. Management stated that there was a marked recovery in the RevPAR for its hotel segment in 3Q and 4Q21, especially in markets where there are big domestic bases. Its US segment saw a 73% yoy increase in 2021 while Europe jumped 129% yoy. In particular, US regional hotels have seen RevPAR approaching or even exceeding their 2019 levels. We believe that all of its markets should see sequential improvement over the course of 2022.
STOCK IMPACT
• Frustration over its share price. It was clear during the analyst briefing that CDL was, and remains, frustrated regarding its share price which has been in a trading range of S$6.80- 7.80 for the better part of the past 12 months. The executive chairman in particular enunciated a desire to “find a strategy to move forward” so that its market valuation better reflects its “true” RNAV. While a share buyback has been discussed at the board level, it ultimately felt that this is “not the answer” as it would have little effect on its share price.
• Cooling measures. CDL pointed out that while 2018’s cooling measures dampened sentiment, buying nevertheless resumed within 1-2 quarters; similarly with the Dec 21 cooling measures, it believes that there are genuine home buyers in the mass and midmarket who do not want to overly delay their purchases and thus the market will adapt to the higher stamp duties. In addition, CDL does not believe that its luxury segment will be deterred by the higher taxes. This echoes the sentiment of other market players that we have spoken to.
• CDL’s capex plans for 2022 will mainly focus on its hotels business; however this is not likely to be significant. The greatest single asset that the company will devote capex to will be the Fuji Xerox redevelopment; however, even here it will relate to construction costs. CDL believes that it has more than adequate dry powder given the recent divestment proceeds and recovery in its business segments. In addition, it highlighted the completion and TOP of various Singapore assets over 2022-23 which will lead to an influx of cash.
• UK REIT – still a work in progress with IPO on track for the next 6-12 months. CDL stated that it is witnessing a strong recovery in London’s office market with its Aldgate asset now nearly 100% leased out (with only the cafe space unoccupied at present) while its 125 Broad St asset has increased its occupancy from low 90s to high 90% in the past few months. In our view, this should provide a solid backdrop for the launch of its UK commercial REIT over the next 6+ months. CDL also stated that it is currently looking to build on-ground property expertise and not manage its own and third-party funds.
• DIS of CDLHT units. In our view, this is a positive move by CDL as it enables the company to: a) improve its net gearing from 61% to 55% on a pro forma basis, b) recognise an estimated gain of S$468m, and c) enable the company to unlock further value from its hospitality portfolio through future transactions. Eligible shareholders will receive 0.159 CDLHT units (valued at S$0.191) for each CDL share held as at Record Date (date to be confirmed), thus allowing CDL shareholders to participate in the hospitality industry’s expected growth trajectory. The DIS appears particularly timely given that it is happening
just past the earnings trough as a result of COVID-19.
EARNINGS REVISION/RISK
• Upgrading earnings. We have upgraded our 2022 earnings by 9% to take into account the resurgence in the hotel segment. Note that our PATMI does not include gains from the sale of investment properties, eg the Seoul Millennium Hilton.
VALUATION/RECOMMENDATION
• We retain our BUY rating on the stock with a higher target price of S$9.20 (previously S$8.50). While our RNAV has risen slightly to S$13.70/share (previously S$13.50), we have lowered our discount to RNAV to 30% to reflect our confidence that much of the company’s assets, particularly in the office and hotel segments, are well on the path towards recovery and higher profitability. We note that CDL disclosed during its 1H21 results briefing that its RNAV (excluding revaluation of its hotel portfolio) was S$15.70/share as at end-21.
SHARE PRICE CATALYST
• Continued economic recovery from COVID-19, especially resumption of leisure and business travel; IPO of UK commercial assets.