In anticipation of a stronger growth in hospitality, analyst Darren Chan from PhillipCapital has upgraded his call on City Developments Limited (CDL) to “buy” but with a lower target price of $8.22 from $8.33 previously.
This new target price is derived from a lower revalued net asset value (RNAV), with a 45% discount to RNAV of $14.94.
Chan says that CDL’s 1HFY2023 revenue ended in June of $2.7 billion (+83.6% y-o-y) was in line and formed 71% of their FY2023 forecast, due to the full revenue recognition of Piermont Grand Executive Condominium (EC) upon completion in 1H2023.
He notes that the group’s patmi underperformed at $66.4 million (-94.1% y-o-y) due to the absence of divestment gains in 1HFY2022, as well as higher financing costs and impairment/fair value losses in 1HFY2023.
Without divestment gains and impairment losses, ebitda and profit before tax increased 48%; patmi increased 1% y-o-y to $104.3 million.
Chan notes two positives for CDL. The first is that the Singapore residential market remains resilient despite cooling measures, as evidenced by the group and its joint venture associates selling 508 units with a total sales value of $1.1 billion in 1HFY2023.
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Sales picked up in 2Q2023 with the launch of Tembusu Grand in April, and in July, the group launched The Myst. The group will be launching a new 512-unit EC in Bukit Batok.
Next, Chan says that CDL’s hospitality segment remains robust. Ebitda grew 69% due to stronger revenue per average room (RevPAR) performance across the portfolio (+42.7% y-o-y
to $151.5).
This was driven by both an 18.3% increase in average room rates to $216.8 and an 11.9% points (69.9% from 58%) increase in occupancy. Compared with pre-Covid 1HFY2019, RevPAR grew 17.2%.
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“We expect RevPAR to continue growing in 2HFY2023, albeit at a slower pace. However, this segment reported a loss before tax of $6.8 million, due to one-off expenses and higher interest expense,” they say.
The group also recently completed the acquisition of the 408-room Nine Tree Premier Hotel Myeongdong II in Seoul in July 2023 for KRW140 billion, and has entered a purchase agreement for a Sofitel hotel in Brisbane Australia for AUD177.7 million.
However, Chan notes two negatives for CDL, where borrowing costs rose to 4.1% for 1HFY2023 compared with 2.4% for FY2022. In addition, net finance cost rose 3.8x y-o-y to $147 million, and net gearing (including fair value on investment properties) also increased to 57% from 51% as at Dec 2022.
He also says that there were sizable impairment/fair value losses of Sizable impairment/ fair value losses on investment properties of $54mn. There were impairment losses of $54 million, where $34 million was lost on UK investment properties, and $20 million of fair value loss on property-linked notes for an Australian project.
Finally, Chan says that CDL aims to strengthen its foothold in the living sector, encompassing both the Private Rented Sector (PRS) and Purpose-Built Student Accommodation (PBSA) segments, which are considered defensive due to their reliable recurring income streams.
It also perceives the current climate as opportune for replenishing its landbank in China, with a focus on tier-1 cities.
CDL continues to see resilient demand for its launched projects as they are mostly in the mid-tier segment, while the recent cooling measures primarily target high-end/luxury properties with a greater proportion of foreign demand.
Shares in CDL closed 9 cents lower or 1.33% down at $6.70.
