RHB Bank Singapore analyst Vijay Natarajan has maintained “buy” on City Developments Ltd (CDL) C09 at a target price of $9.75, highlighting the company’s current acquisition mode.
In his March 31 report, Natarajan describes CDL’s recent acquisition plans of St Katharine Docks (SKD) and Sofitel Brisbane as “opportunistic moves”, well supported by its healthy balance sheet position.
CDL has announced at the end of January that it is purchasing SKD in central London from Blackstone for GBP395 million ($649 million). SKD is a mixed-use estate fronting the River Thames. It comprises Grade A offices, food and beverage outlets, retail and residential units, as well as a marina with berths for up to 185 yachts.
The freehold property is centrally-located with good connectivity. Based on RHB’s estimates, the acquisition translates to an initial net property income yield of slightly above 7%, which Natarajan believes sufficiently buffers the weak near-term economic outlook in the UK.
“With this acquisition, the group now has a sizeable UK commercial portfolio of about GBP1 billion — management noted it could possibly be spun off into a private fund or REIT at the right time and drive in its fund management strategy,” he adds.
Meanwhile, CDL’s acquisition plans to acquire 5-star hotel Sofitel Brisbane Central from Brookfield Asset Management marks its maiden entry into the city’s hospitality sector. The purchase will be made via a 50:50 joint venture with its New Zealand-listed subsidiary Millennium & Copthorne Hotels New Zealand at the price of A$177.7 million.
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The acquisition is subject to government approval and is expected to be completed in 2HFY2023. Natarajan highlights that CDL had earlier guided that it would like to play a more active sponsor role for its listed hospitality trust — CDL Hospitality Trusts — by providing a good asset pipeline for potential acquisitions.
The net gearing, including fair value on investment properties post the two transactions is expected to be at the 60% level, which RHB deems as reasonable.
RHB has revised its FY2023 and FY2024 earnings estimates for CDL by 1% and -3% respectively by factoring in the latest acquisition and fine-tuning financing costs and margins.
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“Operationally, core earnings are expected to rebound this year from healthy residential sales and the hospitality sector recovery,” says Natarajan.
As at 2.28pm, shares in CDL are trading 5 cents lower or 0.67% down at $7.32.
