City Developments: Reaping and sharing the spoils
- Record FY22 earnings of S$1.3b, FY22 dividend of 28Scts, in line
- Positives: i) share buyback approved; ii) strong tailwinds in hospitality; iii) resilient Singapore residential market; iv) asset recycling strategy
- To watch: i) potential acquisition of UK Office / PBSA; ii) higher interest rates; iii) divestments
- Maintain BUY; S$10.50 TP
Record-breaking FY22 results led by gains from divestments and a strong turnaround in hospitality segment; FY22 cash dividend more than doubled y-o-y to 28 Scts.
- City Developments (City Dev) delivered record-breaking FY22 results, recording a PATMI of S$1.3b vs S$85m in FY21, below our estimates due to our more optimistic view on divestment gains. The strong results were mainly due to gains recognized from i) divestment gains from Millennium Hilton Seoul (pre-tax gain of S$0.9b), Tanglin Shopping Centre (S$0.3b) and Golden Mile Complex (S$76m), and ii) total gains of S$493m (including negative goodwill) on the deconsolidation of CDL Hospitality Trust (CDLHT) from the Group following the distribution in specie of CDLHT in May22.
- This was partially offset by impairment losses comprising i) higher allowance for foreseeable losses from UK development project of S$62m, ii) S$81m of remaining exposure to Sincere Property Group, iii) impairment losses for doubtful debt for rental and accrued receivables from China investment property.
- Excluding the divestment gains and impairment losses, hospitality saw the strongest recovery with an estimated PBT of c.S$91m vs pre-tax losses in FY21, property development saw lower contributions, estimated to be c.-11% y-o-y.
- Net gearing was relatively flattish at 84% vs 83% in 2Q22 (on fair value, gearing was 51% vs 52% in 2Q22 and 3Q22), while average cost of debt increased 0.5ppts to 2.4% vs 1.9% in 2Q22. With the rising interest rates, management guided that average cost of debt could increase to c.4% as hedging ratio remains low at 42%, albeit higher compared to 35% in 2Q22.
- Declared a total final dividend of 16 Scts comprising final ordinary dividend of 8 Scts and special dividend of 8 Scts .
- Total FY22 dividend amounts to 28 Scts, in line with our expectations, though a little lower compared to 32 Scts in FY21 following the distribution in specie of CDLHT units. Cash dividend has more than doubled y-o-y, sharing the rewards of divestment gains with shareholders.
Key highlights
- (+/-) Recorded stronger property sales of 775 units, up 9% h-o-h from 712 units in 1H22 (-36% y-o-y). Given the strong residential demand, a few projects are now fully sold with all projects more than 85% sold. Projects that are fully sold include the latest launched Copen Grand (EC), Penrose, Piermont Grand and Sengkang Grand Residences. Haus on Handy which has been lagging previously has achieved 92%.
- Launch pipeline of c.2.1k units with the next launches Tembusu Grand (Tanjong Katong, 638 units) and Newport Residences (Fuji Xerox redevelopment, 246 units) targeted in 1H2023. The remaining project slated to launch in 2H23 is The Myst (Upper Bukit Timah Road; 408 units).
- Management does not view the recent hike in BSD as a major property measure and expects the market to push beyond these adjustments. While management is expecting strong foreign demand especially with the reopening of China, management does not discount that inflation and higher interest rates may price out some interested buyers. As such, management believes the residential market will remain resilient with some upside on property prices.
- (+) Commercial properties – occupancy improved with strong reversions from office portfolio. Both office and retail occupancy saw improvements to 95.2% (+1.4ppts h-o-h) and 96.1% (+0.5ppts h-o-h).
- Republic Plaza achieved 97.6% occupancy with full-year positive reversion of 8.4% (vs 5.6% in 1H22). King’s Centre completed its AEI in 1H22 and achieved strong occupancy of 98.4% with FY22 reversion of 8.9%
- Strong retail occupancy was largely led by City Square Mall (93.5%) and Palais Renaissance (98.2%).
- (+) Hospitality – strong recovery continues with RevPAR at or above pre-COVID levels in all markets except Australasia; expect growth to continue with the return of Chinese travelers in 2023. Hospitality continues to see strong recovery with RevPAR growing 45% h-o-h to S$165, pushing past pre-COVID level of S$142 in FY19. Europe and the US saw RevPAR rising past pre-COVID levels while Asia is close to pre-COVID levels. Australasia (New Zealand) is still lagging but management expects a stronger recovery in 2023 with the reopening of China.
- 2H22 occupancy improved to 71% vs 59% in 1H22. Improvements were led by Asia, Europe and New York markets.
- FY22 estimated EBITDA (ex gains / write back) was c.S$168m vs an estimated S$16m loss in FY21 and c.S$58m in 1H22.
- Management expects RevPAR could continue to trend higher than pre-COVID and remains sanguine as more Chinese travelers return.
- (+) Growing Living Sector Portfolio AUM by 4-fold to achieve scale. City Dev continues to build scale in the Living Sector Portfolio to achieve greater economies of scale that could subsequently be placed into a fund (private or public) or potentially divested.
- In Dec 2022, City Dev acquired 5 purpose-bulit student accommodation (PBSA) assets in UK for GBP215m, adding 1.9k beds to a total of 2.4k PBSA beds in the UK, with a total AUM of GBP637m (S$1b).
- We understand that the PBSA assets are already performing well with high occupancy and strong rental growth. In addition, management said they have received offers to acquire at a premium shortly after their purchase, a statement to the strong interests in the PBSA market.
- Management will continue to build on this portfolio and intends to grow its AUM by 4x in the next 3 years and number of beds by 3x (c.7k to c.8k beds) to achieve operational efficiency.
- (+) Asset recycling opportunities to continue into FY23, bulking up PBSA / commercial properties while divesting non-core / mature hospitality assets.
- Given the successful divestments recently, management will continue with its asset recycling strategy and develop a well calibrated divestment plans in tandem with potential acquisitions.
- While there are no further details on its divestment plans, we believe the potential divestment of non-core M&C portfolio and potential asset recycling opportunities to CDLHT will likely be the key focus.
- Other Singapore assets that are expected to be divested including The Arcade (19 out of 127 strata units) and Katong Shopping Centre (61 out of 425 strata units).
- On asset acquisitions, the media reported that City Dev has signed an exclusivity for due diligence together with a non-binding heads of terms for the proposed acquisition of St Katharine Docks (SKD) development in London. It was reported that this could be priced at c.GBP400m (c.S$651m). Management is excited with the project and looks forward to share more updates soon. Management said this could turn out to be “a very interesting deal” that could surprise the market. The potential acquisition could further bulk up its UK commercial portfolio for potential repositioning into a private or listed REIT in the future.
- (+) Share buyback approved! The long-awaited share buyback has been approved by the board of directors and is ready to be rolled out should the share price fall below its minimum threshold. We believe this scheme will be able to support potential share price weakness.
Maintain BUY; TP of S$10.50. We maintain our BUY rating and TP of S$10.50. We remain positive on City Dev’s organic growth, riding on the second booster from hospitality recovery. City Dev may surprise further with its inorganic growth as it continues to push forward its asset recycling strategy in the medium term. We believe City Dev remains a good buy for the longer term given that the stock is still trading at a historical low level of 0.8x P/NAV (book value at cost). Moreover, potential activation of share buyback will limit any downside risks.
FY Dec | 2H2021 | 1H2022 | 2H2022 | % chg yoy | % chg hoh |
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Revenue | 1,434 | 1,473 | 1,821 | 27.0 | 23.7 |
Cost of Goods Sold | (873) | (889) | (1,157) | 32.6 | 30.2 |
Gross Profit | 561 | 583 | 663 | 18.3 | 13.7 |
Other Oper. (Exp)/Inc | (63) | (188) | 82 | nm | nm |
Operating Profit | 246 | 118 | 436 | 77.7 | 270.6 |
Other Non Opg (Exp)/Inc | 0 | 0 | 0 | - | - |
Associates & JV Inc | 56 | 93 | 77 | 38.9 | (16.4) |
Net Interest (Exp)/Inc | (83) | (39) | (154) | (85.3) | (298.2) |
Exceptional Gain/(Loss) | 0 | 1,413 | (81) | nm | nm |
Pre-tax Profit | 218 | 1,585 | 279 | 27.9 | (82.4) |
Tax | (59) | (433) | (110) | 84.7 | (74.6) |
Minority Interest | (29) | (26) | (3) | 89.3 | (88.0) |
Net Profit | 130 | 1,126 | 166 | 27.8 | (85.3) |
Net profit bef Except. | 130 | (287) | 247 | 90.0 | nm |
EBITDA | 301 | 210 | 514 | 70.5 | 144.2 |
Margins (%) |
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Gross Margins | 39.1 | 39.6 | 36.4 |
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Opg Profit Margins | 17.1 | 8.0 | 24.0 |
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Net Profit Margins | 9.0 | 76.5 | 9.1 |
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