Citi Research analyst Brandon Lee has recommended investors buy into City Developments Limited (CDL) and UOL on the current weakness in both counters’ share prices.
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Property counters on the Singapore Exchange (SGX) declined in the morning of Dec 16 as the government announced another round of property cooling measures in the wee hours of Dec 15.
According to Lee, the kneejerk negative share price reaction to CDL and UOL are expected to be in the region of between 3% to 8%, which are similar to the drop seen during the cooling measures announced in January 2013.
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That said, the drop won’t emulate the 14% to 16% dip following the July 2018 measures given the counters’ cheaper valuations at present.
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In his report dated Dec 15, Lee says he expects a “benign” impact on prices although he expects the en-bloc market to be dampened.
“With [the] removal of policy overhang, we recommend buying both stocks on [share price] weakness,” he writes.
Lee has pegged a target price of $11.02 for CDL, which is set at a 25% discount to its revised net asset value (RNAV) of $14.69, “similar to where it traded at during the past few global downcycles”.
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“Our key assumptions include: residential: 3/3/3% rise in SG prices in FY2021/22/23, office: flat cap rate changes and -5/+5/+7% in SG Grade A rents in FY2021/22/23, hospitality: flat cap rate changes and 32% rise in FY2021 RevPAR following the 65% decline in 2020 and retail: flat cap rate changes and 3-7% decline in SG rents,” says Lee.
Key downside risks to CDL include a potentially weak take-up for residential launches, the introduction of further cooling measures, a sharp economic slowdown and “execution issues in turning around the Millennium & Copthorne (M&C) platform”.
In a separate report on Dec 16, following the government’s announcement that it has ramped up supply for private and public housing, Lee recommends investors buy any dips in CDL, which make “even better entry points”.
Lee has also given UOL a target price of $8.87, which is set at a 25% discount to its RNAV of $11.83.
“UOL and CDL are the most direct proxies to Singapore property, in view of their respective 83% and 60% RNAV exposure,” he says.
He expects UOL to benefit from the pent-up demand for mass-mid residential projects (which make up the majority of unsold inventory) in 2021, as well as expectations of more redevelopments of its aged commercial properties.
“For UOL’s 50.4% stake in UIC, we estimate RNAV/share predicated on a similar set of assumptions for UOL. For UOL’s 2.4% stake in UOB, we assume Citi’s target price,” writes Lee.
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UOL’s potential downside risks stem from a cap rate expansion amid rising interest rates, a sharp economic slowdown, a fall in tourist arrivals and corporate demand, and a prolonged period of existing cooling measures.
On the impact on the physical property market, Lee expects primary volumes to fall between 25% to 30% to 800 to 900 units per month, down from the existing 1,100 to 1,200 units a month in the near-term.
This is mainly due to the reduction of overall investment demand, which currently makes up 20% to 30% of volumes; as well as decreased demand from Singapore PRs and foreigners (which average around 10% to 15% of volumes each) due to the higher additional buyers’ stamp duty (ABSD) fees.
“However, similar to impact from previous measures, we think volumes could normalize to 900-1,000 units after 3-6 months, after buyers acclimatise to the measures amid still-strong fundamentals of the residential market and soft interest rates,” says Lee.
“With a recovering economy and improving household incomes, we expect [a] limited impact to prices,” he adds, noting that prices inched down some 0.7% over two quarters before rebounding following the announcement of the cooling measures in July 2018.
“The nascent recovery in [the] en-bloc market could be reasonably impacted with higher ABSD for entities, which alongside larger land supply, should mitigate further spike in land prices. We forecast number of Confirmed List sites could expand from [around] 3,500 units (average from 2019-2021) to [some] 5,600 units (average from 2014-2018),” he continues.
As at 12.27pm, shares in CDL and UOL are trading at $6.68 and $7.02 respectively.
Photo: Samuel Isaac Chua/The Edge Singapore
