City Development - SELL: Challenging Operating Environment

Results lower than expected due to write-downs at M&C — For 4Q08, CityDev reported a net profit of S$100m, down 33% qoq and 57% yoy. The steep decline was due largely to net impairment losses, amounting to S$90.8m, on some assets held by M&C, and a loan to a joint venture in Bangkok. Excluding all one-offs, pre-tax profit was closer to S$182m, flat from 3Q and down 22% yoy. No provisions were made for its residential landbank.

Slower than expected recognition on residential — Residential property continues to account for about 60% of its pre-tax profit, registering a pre-tax profit of S$82.2m in 4Q08, down 9.8% qoq and 32% yoy, due to the lower contributions from several key projects (The Sail and St Regis) as they complete. M&C and investment properties recorded lower contributions due to impairment losses.

Strong balance sheet — If CDL were to mark-to-market its investment properties, instead of holding them at cost less depreciation, its gearing would be 32% instead of the reported 48%.

Earnings upgrade — We have upgraded our earnings for FY09E (16%) and FY10E (33%) to reflect the lower-than-expected recognition in FY08 and the lower-than-expected minority interest.

Maintain SELL — Although we like CityDev’s astute management and strong track record, we maintain our SELL on the stock given the weak operating environment. Continued negative newsflow is likely to cap any upside potential in the short term.

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