City Development - Residential Versatility

Upgrade to BUY at S$12.34. Despite its reasonable exposure to Singapore’s deteriorating office sector (35% of RNAV) and weakening global hospitality industry (16% of RNAV), we believe the market continues to view City Developments (CDL) as the best proxy to the domestic residential market (35% of RNAV). From this angle, we think there is still upside re-rating potential for the counter, notwithstanding a 13.0% MoM (vs. Sector’s +20.8%) jump in share price. We reckon CDL’s versatile residential portfolio allows it to benefit during periods of downcycle and upcycle. With an expected shift in buying sentiments towards mid-prime projects, we believe CDL should benefit from launching and re-launching projects within these two segments. CDL trades at 1.22x P/B during the initial phases of property recovery cycles. We thus peg our new target price for the stock at a 20% premium to our new base case RNAV of S$10.28. Upgrade to BUY at S$12.34.

Best proxy to improving domestic residential sector. With a residential portfolio spanning the mass, mid and prime segments, CDL remains the best proxy to the domestic property sector. We view management’s ability to time its launches to good effect (during both downcycle and upcycle periods) positively. This is best evidenced by its recent buoyant sales for The Arte (we estimate > 80% sold to date) at a time when buying sentiments remain tepid. This can be best compared to its launch of The Sail during the last downcycle. Aside from continuing to benefit from the mass market interest, we reckon CDL could also begin looking at soft launching some of its mid-prime projects to tap the growing interest within this segment. Risks of provisions also appear low as its undeveloped land bank was mostly acquired at relatively low prices.

Strong balance sheet. While we admit that CDL’s balance sheet is not as strong as KepLand and CapLand, we view a net gearing of 0.49x as healthy enough to tide through the current period. With already 6.2m sqf in GFA (Mass: 3.7 sqf, Mid-Prime: 2.6 sqf) in its residential stable, landbank expansion does not form a salient need for CDL, in our opinion.

Sponsored Links

Related Posts by Categories