SINGAPORE (Dec 11): UOB Kay Hian is maintaining its “buy” call on City Developments (CDL) with a target price of $14.03.
This came on the back of the group announced that the Millennium & Copthorne (M&C) independent directors have reached an agreement on the increased privatisation offer of 620 pence per share to acquire the 34.8% of the hotelier that it does not already own.
CDL currently is the majority shareholder of M&C, owning 65.2% of the hotelier.
See: M&C Hotels agrees to sweetened 620 pence per share offer from CityDev
This consideration is 12.2% higher than the earlier proposed offer on Oct 6 of 552.5 pence per share.
See: City Developments to take Millennium & Copthorne private, values hotel group at $3.2 bil
In a Monday report, analyst Vikrant Pandey says, “The raised offer of 620 pence per share is still at a 0.76x P/B, suggesting potential acquisition of M&C’s hotel assets at over 25% discount to prevailing market value.”
Upon acquisition, CDL intends to run M&C’s hotel businesses as an owner and operator, as well as maintain its current business model.
Meanwhile, the group has explicitly stated that it does not intend to sell or repurpose any of the M&C hotels in London or New York for at least three years.
CDL’s hotel assets in other geographies make up 56% of its total hotel operating assets or approximately £1.50 billion ($2.71 billion).
According to Pandey, one of the means to unlock the remaining 56% of M&C hotel operating assets is in changing the ownership structure, such as parking them into a REIT and owning them via share ownership into the REIT.
“Also, streamlining of operations and bringing synergies in will also help to narrow the valuation discount that investors typically apply for asset-heavy hotel operators, due to their high capex requirements and difficulties scaling up,” adds Pandey.
CDL will be financing its acquisition with existing cash resources as well as funds made available to the group under an $800 million dual currency credit facility.
The analyst also believes that CDL may ride on the improving global hospitality outlook, especially in key markets such as London and New York.
As at 11.36am, shares in CDL are trading at $12.43 or 1.1 times FY18 book with a dividend yield of 1.3%.
