City Developments Ltd

Maybank Kim Eng Research, Nov 13

ANOTHER soft quarter. Excluding the S$5.8 million of investment gains, CDL's Q3-2013 core Patmi (profit after tax and minority interests) came in at S$115 million. 9M-2013 core Patmi of S$291.3 million came in below at 53 per cent of our full-year estimate, due mainly to the timing of profit recognition and continued weak hotel earnings. We lower our FY13 core Patmi forecast by 8.6 per cent as we adjust our profit recognition model. Maintain "sell", with a revised target price of S$9, pegged to a 30 per cent discount to RNAV, adjusted for the market value of its stake in M&C (Millennium & Copthorne Hotels).

Residential was the biggest profit contributor in Q3-2013, accounting for 50 per cent of profit before tax, with a number of pre-sold projects yet to contribute to earnings. Recent launches - The Venue Residences and The Inflora at Flora Road - had mixed responses, achieving sell-through rates (percentage of units sold) of 25 per cent and more than 95 per cent respectively, with pricing being a determinant of demand. Management is in no rush to launch South Beach Residences (S$3,000 psf), perhaps biding its time to gauge the response at the upcoming launch of DUO Residences nearby.

Asia continues to underperform for M&C. In Q3-13, Asian RevPAR (revenue per available room) for M&C fell by 4.2 per cent y-o-y (on constant currency), led by a 7.1 per cent decline in Singapore where rising labour cost remains a concern. US was a bright spot, boosted by higher room rates at ONE UN New York. M&C has inked a Collective Sales Agreement for Tanglin Shopping Centre, in which it has a 34 per cent interest. This will be the third time the property is put up for en-bloc sale, valuing the property at S$4,000 psf of allowable GFA (gross floor area). We believe the reserve price has to be lowered significantly to make it commercially viable for any prospective buyer.

Growth opportunities are getting limited. With limited opportunities in Singapore due to high land costs, CDL has made its first acquisition in London, acquiring a multi-storey carpark in Knightsbridge for £80 million (S$158.7 million) with the intention of redeveloping it into a luxury residential development. However, London land costs are also rising. In China, the group is likely to focus on launching at least one project in 2014 before acquiring new sites, in our view.

SELL