RHB Group Research analyst Vijay Natarajan has lowered his target price for City Developments Limited (CDL) from $8.80 to $8.20, as he awaits stronger catalysts to boost the performance of the property developer through 2HFY2023.
Natarajan has, however, maintained his “buy” call, although he says that CDL’s 1HFY2023 earnings ended June were disappointing, due to the hospitality arm’s recovery being dragged by higher financing costs and lower development margins.
The analyst expects a better 2HFY2023 performance on contributions from new hotel acquisitions, stronger hospitality performance, and higher contributions from the Singapore residential segment.
For the 1HFY2023, CDL’s Singapore residential property portfolio has remained resilient, with sales across its launches remaining “healthy”, according to the analyst. The group sold about 90% of its launched units in residential projects so far, and estimated unbilled sales of more than $4 billion.
“Despite the recent set of additional property cooling measures, its latest launch, The Myst, saw a decent 32% of total 132 units sold at an average selling price (ASP) of $2,057 psf,” he says.
Natarajan expects a strong demand for the developer’s new Bukit Batok West Avenue executive condominium launch, and anticipates a push back of the 45-storey mixed-use development Newport Residences, which had already been deferred once, to next year.
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The analyst notes that CDL’s fund management arm is not likely to hit its target of US$5 billion ($6.77 billion) assets under management by the year-end, as it currently stands at US$3.1 billion, due to challenging market conditions.
But he sees more opportunities for acquisitions and divestment opportunities next year, with interest rates peaking.
“A possible spinoff of its mature and sizable purpose-built student accommodation (PBSA) and private rented sector (PRS) assets in the UK, Japan and Australia into a separate fund or a REIT will be a positive share price catalyst,” he adds.
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Finally, the analyst says that the hotel segment of the business saw a strong recovery in the 1HFY2023, but continues to be marred by cost pressures.
With a 1HFY2023 group revenue per available room (RevPAR) of 17% above 2019 levels, driven predominantly by rates and the post-pandemic travel boom, Natarajan says that the Millennium & Copthorne (M&C) hotel portfolio continues to recover strongly.
However, the profit before tax contributions were impacted by rising interest costs resulting in an overall loss of $7 million.
He expects this to be reversed in 2HFY2023, with interest costs expecting to peak around 4.25% for the full year.
As such, the analyst has cut his FY2023-FY2024 net profit forecasts by 14% and 13$, to reflect CDL’s higher interest costs.
“Our target price is pegged to a 45% discount to its revalued net asset value of $14.06/share. Our environmental, social and governance (ESG) score of 3.3 out of four is three notches higher than the country median – so we have applied a 6% ESG premium to derive our target price,” he says.
As at 3.27pm, shares in CDL are trading 1 cent lower, or 0.15% down at $6.69.
