RHB Bank Singapore analyst Vijay Natarajan has kept his “buy” call on City Developments (CDL) with a lowered target price of $7.30 from $8 previously, after the company significantly underperformed at a 15% loss year-to-date against the Straits Times Index’s (STI) 3% rise.
“We believe investors fear its rising debt, which results in interest cost pressures and low return on equity (ROE). Management has reiterated divestments as a key focus this year (target: around $1 billion) – the materialisation of which will be a positive catalyst, in our view,” writes Natarajan.
He continues: “We raise our revised asset net value (RNAV) discount to 50% from 45% amid gearing concerns, but maintain our call with share prices trading near historic lows and two standard deviations (s.d.) below its price-to-RNAV ratio (P/RNAV) – limiting the downside.”
Meanwhile, earlier in April, CDL and Mitsui Fudosan acquired a site at Zion Road for $1.1 billion, which can be developed into 740 residential units, a retail podium, and 290 rental apartment units.
CDL has a 50% stake in the project.
Natarajan writes: “We see CDL’s bid of $1,202/square feet (sq ft)/plot ratio as reasonably attractive, at around 30% below comparable land parcels sold in past years and accretive to bottomline.”
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The company has also submitted two joint tender bids for the master developer site at Jurong Lake District, with the outcome set to be announced by 3QFY2024.
These moves follow the healthy response to CDL’s projects, with 429 units sold in 1QFY2024, generating $737 million in sales value or three times of last year’s numbers.
The company has also been active in Europe, having acquired the 268-room Hilton Paris Opera hotel in May for EUR240 million ($350 million), and the Yardhouse project in the UK for GBP88 million ($149 million) in April, which will be developed into 209 co-living studios.
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Following the UK acquisition, CDL’s UK living sector portfolio will comprise 1,857 operational and pipeline units and 2,400 beds in the purpose-built student accommodation sector.
Additionally, the company also has private rented sector assets in Japan and Australia which can provide a combined $3 billion in assets, which Natarajan notes: “can eventually be divested into a fund or REIT to trim gearing and boost ROEs, in our view.”
Notably, CDL’s net gearing including the future values of its investment properties is set to rise to around 65% post-acquisitions, and has been steadily rising over the last few years with “more acquisitions than divestments”.
“Rising interest costs have put a strain on its earnings, with interest cover for 1QFY2024 falling to 1.2 times. While the group is currently marketing various retail and industrial strata units in Singapore,we believe more sizable divestments are needed to assuage ballooning interest cost pressures,” notes Natarajan.
After factoring in higher financing costs, the analyst has lowered his FY2024 to FY2025 profit after tax and minority interests (patmi) by 8% to 14%.
He adds: “CDL’s latest sustainability report shows good progress in achieving its ambitious environmental targets, but we see room for improvement in the governance framework and earnings transparency.”
Key drivers noted by Natarajan include CDL’s strong recovery in hospitality and a steady build-up of its recurring income stream, the resilient Singapore residential market with healthy unbilled sales and the company's strong brand presence and track record in Singapore.
Conversely, key risks include disappointing or negative returns from its overseas venture, an unexpected sharp decline in Singapore’s economy and the continued rise in interest rates.
As at 11.35 am, shares in City Developments are trading one cent higher or 0.19% up at $5.41.
