What's new: CDL’s 1Q09 operating and net profit were ~7% below our full-year estimates. In addition to lower hospitality earnings, our 2009 forecasts assume higher sales and construction progress from the Wilkie Edge, Shelford Suites, and Livia projects. While the construction progress will likely meet our forecasts, sales at mid-end projects Wilkie Edge and Shelford may fall short of our expectations. However, the shortfall could be offset by upcoming contributions from Arte at Thomson, which was successfully launched above our expectations. On a positive note, in addition to Arte, the re-launch of low-end project Livia led to the sale of 189 units in April alone versus 159 units sold in 1Q09. Encouraged by the low-end segment, CDL is preparing to launch its West Coast project – the former Hong Leong Garden Condominium – in 4Q09. Meanwhile, illustrating the tough office market, CDL’s office portfolio’s occupancy has weakened from 94% in 4Q08 to 91% currently. In addition, pre-leasing for the remaining ~25% of retail space at City Square Mall which is due to open in 4Q09, remains challenging.
Worst Not Behind Us Yet, hence fundamentally, we believe current sector valuations are unjustified. In our view, property stocks could trade down in tandem with the downward momentum in office rents and residential prices. For the rest of 2009, we would look to switch into higher-yielding S-REITs, with our S-REIT sector top pick CapitaCommercial Trust (CACT.SI, EW, S$1.02).
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