City Developments: Weak M&C earnings a prelude to CDL 1Q09 results

M&C pre-tax earnings down 50% YoY in 1Q09. Millennium & Copthorne (M&C), the hotel subsidiary of City Developments (CDL), reported its 1Q09 yesterday. Revenue declined by 1.9% YoY to £50.7m but on a constant currency basis, it would have fallen 18.2% YoY. Hotels in New York and Singapore were the underperformers in 1Q09, as RevPAR fell by 37.8% and 30.6% YoY respectively. Headline operating profit before tax plunged 50% YoY to £11m. On a constant currency basis, it was down 58.6% YoY. For April, RevPAR continued to deteriorate sharply, falling by 22.9% YoY.

Weak GBP-SGD exchange rate could further weigh on results. We believe that the weakness in M&C's 1Q09 results could be further compounded on the financials of CDL due to the weakness in Pound sterling (GBP) (M&C's reported currency) against SGD (CDL's reported currency). During 1Q09, GBP was trading at a band of S$2.0734-S$2.2510 per £, which was 17.5%-27.5% lower than the band of S$2.7289-S$2.861 per £ in 1Q08. On a QoQ comparison, GBP stayed weak against the SGD in 1Q09, trading at the lower half of the GBP-SGD band of S$2.0709-S$2.5701 per £ in 4Q08.

Influenza H1N1 virus. The hospitality industry had already been badly affected by the financial crisis and economic slowdown. With the recent outbreak of Influenza H1N1 virus, the hospitality industry could sink into deeper woes as we expect to see a further decline in global travel if the virus outbreak worsens. In a situation whereby the virus outbreak turns for the worse from current status, CDL's earnings could be negatively affected as it has significant exposure to the hospitality segment (63.4% of FY08 revenue and 29.4% of FY08 pre-tax profit coming from hotel operations). This was evident during the SARS period in 2003 when M&C reported pre-tax loss of £6.3m for 1H03.

Downgrading to SELL. As CDL is announcing its 1Q09 results next Monday, we are now keeping our earnings estimates unchanged for now. Its share price has now surged 85.2% from its March low of S$4.05 and base on yesterday's closing price of S$7.50, CDL is now trading at Price/ Book of 1.26x and Price/RNAV of 0.99x, which is already at the upper band of its historical downcycle Price/RNAV band. We are keeping our fair value of S$5.53 unchanged, implying a downside potential of 26.3%. While we still like CDL for its strong balance sheet and prudent management, we are now downgrading CDL from HOLD to SELL on its heightened risk profile and valuation concerns.

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