Analysts from DBS Group Research, PhillipCapital, RHB Group Research and UOB Kay Hian are keeping their “buy” recommendation on City Developments Limited (CDL) after the group posted earnings of $129.7 million for the 2HFY2021 ended December on Feb 25.
During the same period last year, CDL reported losses of $1.92 billion due to write-offs.
DBS analysts Rachel Tan and Derek Tan says they see “light at the end of the tunnel” for the group, especially from its hospitality segment, as “growth momentum returns and the economy picks up”.
The way they see it, CDL has accelerated its pace in optimising its portfolio and unlocking deep hidden value via asset divestments to realise huge gains or redevelopment with an uplift in its gross floor area (GFA).
“We believe investors will eventually appreciate the stock as CDL realises more gains,” write the analysts in their Feb 28 report.
According to the analysts, CDL is currently trading at “distressed valuations” at 0.8x P/NAV, below the low seen during the global financial crisis (GFC).
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“We believe valuations are too cheap to ignore as CDL has all [its] stars aligned towards recovery and growth,” declare the analysts.
However, downside risks to the counter include a longer drag in the economic recovery, which will raise earnings risks. The additional property cooling measures that could impact Singapore’s residential market may “see prices and demand soften, thus impacting its unsold stocks”, they write.
The analysts have kept their target price of $10.50, which implies 1.1x P/NAV, slightly above -0.5 standard deviation of CDL’s historical range.
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PhillipCapital analyst Natalie Ong has kept her target price of $9.19 as she sees a "promising turnaround" for the group.
"We view CDL as proxy for the Singapore residential market and hospitality recovery play. CDL is trading at an attractive 48% discount to our RNAV/share of $14.14," she writes in her March 14 report.
"Asset monetisation, unlocking value through AEIs and redevelopments, and faster-than-expected recovery in hospitality portfolio are potential catalysts for CDL, which could help narrow the discount between CDL’s share price and RNAV," she adds.
RHB’s Vijay Natarajan has raised his target price to $9.25 from $9 as he sees CDL being set for a “turnaround”.
On the back of the higher target price, he has also upped his revised net asset value (RNAV) estimates by 3%, which factors in the recent acquisitions and divestments made by the group.
“CDL has been actively replenishing its Singapore residential land bank with acquisitions of five sites since last year as strong sales momentum across its launches has depleted its inventory with an estimated unbilled sales of over $3 billion,” notes the analyst.
“The group has also commenced [the] redevelopment of former Fuji Xerox Towers into an integrated development, tapping on CBD Incentive Scheme with similar plans underway for Central Mall & Central Square. We see the above as positive steps with [an] anticipated return on investment (ROI) [of over] 15%,” he adds.
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Like the analysts at DBS, Natarajan sees CDL as currently trading at a “deep” 55% discount to his RNAV.
On the distribution in specie of units in CDL Hospitality Trusts (CDLHT) in addition to the cash dividend of 12 cents per share, Natarajan sees it as a “clever way of rewarding shareholders”.
“[The move] reduces its stake from 38.7% to 27%, thereby deconsolidating from its balance sheet and recognizing an estimated gain of $467.5 million. Unitholders on the other hand, may potentially be able to enjoy the upside from hospitality recovery,” he writes in his Feb 28 report.
UOB Kay Hian analyst Adrian Loh has also raised his target price to $9.20 from $8.50 previously as CDL swung back to profitability during the 2HFY2021 “after its Sincere misadventure in 2020”.
“One of the main highlights of the result was the hotel segment’s return to profitability in 2HFY2021, with management reiterating during the analyst briefing its strong belief that the hospitality sector will imminently rebound,” says Loh in his Feb 28 report.
Within CDL’s hotel segment, management noted that there was a “marked recovery” in the revenue per average room (RevPAR) in the 3QFY2021 and 4QFY2021, especially in markets with large domestic basis, writes Loh.
“Its US segment saw a 73% y-o-y increase in 2021 while Europe jumped 129% y-o-y. 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,” says the analyst.
On the impact of the property cooling measures in Singapore, Loh says the group remains confident on its sales prospects.
“CDL pointed out that while 2018’s cooling measures dampened sentiment, buying nevertheless resumed within one to two quarters; similarly with the Dec 2021 cooling measures, it believes that there are genuine home buyers in the mass and mid-market who do not want to overly delay their purchases and thus the market will adapt to the higher stamp duties,” he writes.
“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,” he adds.
He has also upped his earnings estimates for the FY2022 by 9% to account for the resurgence in CDL’s hotel segment.
“Note that our PATMI does not include gains from the sale of investment properties, eg the Seoul Millennium Hilton,” he writes in his Feb 28 report.
To this end, Loh has upped his earnings estimates for the FY2022 by 9% to account for the resurgence in CDL’s hotel segment.
“While our RNAV has risen slightly to $13.70/share (previously $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,” he adds. “We note that CDL disclosed during its 1HFY2021 results briefing that its RNAV (excluding revaluation of its hotel portfolio) was $15.70/share as at end-2021”.
Catalysts to CDL’s share price, according to Loh, includes the continued economic recovery from Covid-19, especially the resumption of leisure and business travel, as well as the listing of its UK commercial assets.
As at 9.15am, shares in CDL are trading 1 cent lower or 0.14% down at $7.
Photo: Albert Chua/The Edge Singapore
