City Developments: S$6.09 NEUTRAL (TP: S$5.53) - A Subdued 3Q08

City Developments Limited (CDL) registered an 11.0% YoY dip in 3Q08 PATMI to S$150.8m. On a 9-month basis, PATMI came to S$481.0m, which was slightly under expectations, accounting for 64.5 – 68.0% of our projections and the Street’s. Development plans for South Beach have been deferred. Aside from the expectation of softening construction costs, we surmise it could also be attributable to capital preservation being top of the participating companies’ agenda given the ongoing tight credit conditions. Despite delaying the launch of The Arte and The Quayside Collection, their constructions are set to continue due to the low building costs secured and land costs of under S$400 psf ppr. As such, we believe CDL could launch them at attractive prices when sentiments improve, and book in a relatively higher amount of cashflow. Only a third of CDL’s pre-sold DPS-qualifiable projects were sold under the scheme, while a bulk of CDL’s projects under development would only be completed in 2010 and 2011, which should allow buyers to have a reasonable amount of time to secure bank loans especially with interest rates expected to remain soft. From our view, CDL’s share price in the near-term would be weighed down by an ongoing global slowdown within the hospitality sector, as well as weak sentiments in the domestic property sphere. However, its portfolio of more mass-mid market residential landbank and current/future projects suggests that it is in a better position to ride on any remaining interest from genuine owner-occupiers, and any potential spillover from the still-buoyant activity within the HDB segment. For the next two years, we estimate that CDL should be able to book in approximately S$400 – 500m worth of PBT from previously sold units. Further, with a cash position of S$813.3m and net gearing of 0.47x, its balance sheet remains healthy. Nonetheless, in view of the anticipated residential slowdown, we have delayed our sale & launch schedules for CDL’s domestic residential projects, as well as assumed price declines of 3 – 8% for the remaining 2008 and 10 – 20% for 2009, with a slight 1 – 5% improvement in 2010. Additionally, we have accounted for a higher cap rates (+25 – 50bps) for its investment properties, as well as pegging the target prices of its two listed entities to current market prices. As such, earnings estimates for FY08F and FY09F are trimmed by 9.4 – 22.1% to S$640.5m and S$600.2m respectively. Discounting our new base case end-09 base case RNAV of S$11.05 by trough metrics of 50%, we trim our fair value for CDL to S$5.53 (previously S$11.25). Maintain NEUTRAL.

source:DMG

The Material provided above is for information only and does not constitute an offer or solicitation to purchase or sell the shares mentioned