City Developments Ltd

OCBC on 26 June 2012

We forecast that an environment of continued low interest rates and abundant liquidity would support prices and demand for mass-market units in FY12. By our estimates, a significant 51% of CDL’s unsold domestic residential landbank, in terms of gross development value (GDV), fall into the outside central region (OCR), which points to ample landbank for continued residential sales in the remainder of FY12. Moreover, with earnings buttressed by diversified hotel and commercial exposures, we believe CDL warrants a re-rating and reduce its RNAV discount to 20% (from 30% previously). Upgrade to BUY from Sell, with an increased fair value estimate of S$11.53 versus S$8.92 previously.

Low interest rates to underpin mass-market prices in FY12
We forecast that an environment of continued low interest rates and abundant liquidity would support prices and demand for mass-market and shoebox units in FY12. By our estimates, a significant 51% of CDL’s unsold domestic residential landbank, in terms of gross development value (GDV), fall into the outside central region (OCR), which points to ample landbank for continued residential sales in the remainder of FY12. Moreover, with healthy sales seen over the FY10-11, we calculate that progress billings in excess of S$2.0b from already sold units would underpin earnings for the CDL’s residential segment ahead.

Strategic land-banking continues
We like that management is continuing to strategically acquire land-bank. It recently acquired, from a GLS tender, a 18,341 sqm site in Buangkok Drive/Sengkang Central (max allowable GFA of 55,023 sqm). The site is about 5 to 10 minutes from the Buangkok MRT station and is accessible to the Tampines Expressway and the Kallang-Paya Lebar Expressway. CDL’s top bid of S$301m translates to a land price of S$508 psf, which is 37% above the second highest bidder. We estimate breakdown and selling average prices of S$920 psf and S$1,050 psf (based on prices at The Luxurie), respectively, which points to a 14% profit margin.

Upgrade to BUY with increased S$11.53 fair value estimate
CDL also has a strong balance sheet position, with S$2.6b in cash and a low net gearing ratio of 21% (as of end 1Q12). Interest cover is at a solid 16.5 times. In addition, with earnings buttressed by diversified hotel and commercial exposures, we believe CDL warrants a re-rating and reduce its RNAV discount to 20% (from 30% previously). Upgrade to BUY from Sell, with an increased fair value estimate of S$11.53 versus S$8.92 previously.