Large inventory and unbilled presales put CityDev ahead of the curve. Take-up for The Arte has been good with over 90 units sold at ASPs of S$880psf. Margins remain healthy, thanks to its low land cost. We believe CityDev has enough lowcost land bank to meaningfully participate in the current mass-market rally. Cash flows remain strong with management expecting unbilled presales to last till end-FY10. However, its stake in South Beach remains a concern. Including others, we estimate total provisions could exceed S$500m or 7% of total book value.
Resilient commercial book values but little upside in the mid-term. CityDev’s commercial properties are booked at cost and write-downs are unlikely soon. However, with new supply of office space expected in the next three years, commercial rents for its older buildings could face further downward pressure. Anecdotally, we observe that cap rates have risen from 3% in 2007 to 5.8%.
Downgrade to Underperform from Outperform on valuations. We lower our FY09-11 core EPS estimates by 3-26% as we now peg selling prices closer to the last down-cycle in 2003-04. Our end-CY09 RNAV estimate has been lowered from S$7.32 to S$5.92. Our target price, however, has been raised from S$5.90 to S$5.92 as we now peg our target at parity to RNAV (previously 20% discount for further downside potential in selling prices). We believe our estimates adequately capture downside risks in capital values. Downgrade to Underperform from Outperform on valuations.
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