Analysts at UOB Kay Hian (UOBKH), OCBC Investment Research (OIR) and Citi Research have kept their “buy” calls on City Developments (CDL), but have issued different target prices for the real-estate group.
UOBKH’s Adrian Loh has announced an unchanged target price of $8, noting that CDL had a muted 1HFY2023 results ended in June, with its strong ebitda growth overshadowed by financing costs and one-off items.
CDL reported a revenue of $2.7 billion for the 1HFY2023, an 84% increase y-o-y which was boosted by the completion of the Piermont Grand executive condominium (EC), resulting in full revenue recognition of the project.
Loh notes that its ebitda of $478 million (excluding divestment gains and impairments) was 48% higher than the same period a year ago, and while it beat his expectations, it missed consensus estimates.
CDL’s $66 million net profit was substantially lower than the 1HFY2022 which had seen substantial gains from the divestment of its hotel in Seoul and a gain from the deconsolidation of CDL Hospitality Trusts, says Loh.
CDL’s special interim dividend of 4 cents was also lower than the 12 cents announced a year ago.
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Loh notes that CDL’s $34 million impairment loss witnessed a 20-50 basis points (bp) in cap rate expansion, leading to a drop in its valuation. In addition to the impairment loss, there was also a fair value loss on property-linked notes for an Australian project ($20 million).
“Although financing costs in the UK have risen by four times vs same period last year, management sees near-term stabilisation, and continues to believe that its UK investment properties have bright prospects,” says Loh.
Meanwhile, Loh notes that CDL’s Singapore residential sector looks stable, with the sales launch of Tembusu Grand, a new EC launch in 1Q2024, and Central Mall redevelopment in early 2024.
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CDL’s hotel operations remain “a bright light” with a 69% increase in ebitda with occupancy increase by 12 percentage points (ppt) y-o-y to 79% and revenue per available room (RevPAR) up 43% to $152.
Loh says that new projects in CDL’s pipeline in the UK and Japanese living assets present a strong outlook, and notes that the company is looking to get back into China.
Finally, Loh notes that CDL’s balance sheets have been slightly weaker over the past six months, with net gearing reaching 57% at end 1HFY2023 vs 52% as at the end of 1HFY2022.
“We also note that its interest cover has declined from 9.8x at end-2022 to 2.8x at end 1HFY2023, and its cash and available committed credit facilities had fallen from $4.1 billion at end 2022 to $3.4 billion at end 1HFY2023,” he adds.
For this reason, Loh has put through a material 65% downgrade of his FY2023 earnings, but notes that this is “very much in the rear-view mirror” given that they mostly relate to one-off items in 1HFY2023, as well as higher-than-expected financing costs. He says that the outlook appears reasonably solid with interest rates likely to decline over the next 12 months, and continued robust performance from its property development and hotel arms.
Loh’s target price is pegged to a 40% discount to his assessed revalued net asset value (RNAV) of $14.10, which is largely in line with the company’s historical discount to RNAV.
“We note that CDL disclosed at its results briefing that its RNAV (including the revaluation of its hotel portfolio) was $18.97 per share as at end-1HFY2023. Applying its 10-year trough P/B of 0.64x to its FY2023 book value would imply a share price of $6.45,” he says.
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While the research team at OIR has also retained its “buy” call, it has reduced its target price from $8.91 to $8.87, citing strong revenue but “weak core earnings recognition” as its reason.
The analysts say that CDL has shown clear signs of recovery from the pandemic across various business operations, and note that the company has been proactive in reconstituting its portfolio to unlock value for shareholders.
This includes the divestment of assets at a premium to their book values and the redevelopment of some of its older commercial properties in Singapore to benefit from the government's Central Business District (CBD) Incentive Scheme.
However, notwithstanding these positives, they believe the softer global economic outlook and higher interest rates could be potential dampeners to its growth prospects.
In addition, the analysts say that management pushed out its target of achieving $5 billion in assets under management from 2023 to 2024 due largely to lacklustre capital market conditions.
“After adjustments, our fair value estimate is reduced from $8.91 to $8.87,” they say.
Finally, Citi’s Brandon Lee presents as the most positive on CDL, with the highest target price of $10.29, as he is optimistic about the group’s overseas acquisitions.
Lee notes that CDL continues to push for acquisitions in UK, China, Australia, Japan and Vietnam, and will focus on the private rented sector for its asset classes.
Lee’s target price is set at a 25% discount to its RNAV of $14.06, similar to where it traded at during the past few global downcycles.
“Our key assumptions include a 2%/3%/2% rise in residential prices in Singapore in 2022/2023/2024, flat cap rate changes of +6%/+3%/-5% in Singapore Grade A office rents in 2022/2023/2024, flat cap rate changes and 5% rise in 2022 RevPAR following the 1% improvement in 2021 for hospitality, and flat cap rate changes and 1-2% rise in Singapore retail rents,” he says.
As at 3.52pm, shares in CDL are trading 1 cent higher, or 0.15% up at $6.80.
