City Developments (CityDev) is too cheap to ignore, according to DBS Group Research in an Aug 6 report. The stock is currently trading at 0.7 times price-to-net asset value (P/NAV), which is close to -1.5 standard deviation (SD) of its five-year historical trading band.
With that, lead analyst Rachel Tan continues to rate CityDev a “buy” with a lower target price of $10.50 from $13.00 previously.
Although the Covid-19 pandemic has impacted most of CityDev’s business segments especially the hospitality sector, its current share price has priced in most of the downside risks.
“We believe valuations are too cheap to ignore as CityDev is positioned for recovery post-Covid reopening,” says Tan, who is also hopeful that the government may consider providing additional support to developers should the economy recover slower than expected and unemployment increase substantially.
Meanwhile, CityDev’s launches have done well YTD. It has been actively selling its residential inventories in Singapore, achieving a sell-through rate of some 43% across all its projects (FY19), one of the better performers amongst its peers that averaged about 30% sell-through in 2019. This could be attributed to active marketing and positioning of its projects.
As for the company’s overseas investments, Tan notes that they are bearing fruit and is watching out for this to be a potential REIT platform.
In London, CityDev invested in two landmark Grade A office buildings in London in 4Q18 (totalling $1 billion), taking advantage of opportunities from the withdrawal of the UK from the European Union (Brexit). Its passing yield is 4.7-5.0% with medium-term growth potential by yielding up the properties and potential for positive rental reversions from its currently under-rented leases. The group continues to explore more opportunities to bulk up in the hope of launching a REIT.
In China, it will continue to focus on the execution and delivery of Hong Leong City Center (Suzhou), Eling Palace (Chongqing), Emerald (Chongqing), and Hongqiao Royal Lake (Shanghai); while in Australia,The Marker project in Melbourne saw strong sales and CityDev will look to launch two other projects in Brisbane and Melbourne in FY20.
On the other hand, CityDev intends to accelerate its efforts to develop a fund management business to drive recurring income, achieve a more efficient capital structure and offer recycling opportunities for the group to deploy capital more actively.
With three Profit Participation Securities (PPS) already under the fund management platform (all of which are in various stages of unwinding), the group intends to launch more co-mingled funds or joint ventures, acquire platforms, and manage third-party capital.
It will also explore the possibility of launching another REIT. The group aims to build an asset under management (AUM) of US$5 billion by 2023 and US$12 billion by 2030.
However, CityDev has issued a profit warning, which has caused Tan to lower her FY20 and FY21 estimates substantially by 23% and 75% respectively, recognising some of the guided declines in contributions from property development and investment properties and losses from the hospitality sector. But potential impairments and negative goodwill from the acquisition of Sincere Property have yet to be included.
CityDev is expected to release its 1H20 results on Aug 13.
As at 12.20pm, shares in CDL are trading at $8.22 or 0.7 times FY20 book with a dividend yield of 1.9%.
