City Development - Residential titan

Best proxy to improving domestic residential sector. City Developments’ (CDL) massive yet broad-based residential exposure (37% of RNAV) makes it the best proxy to the improving domestic residential market. Going forward, we expect CDL to ride on the mass-mid market buoyancy and clear inventory. An expected return of interest in prime properties should also benefit the company. While the commercial property sector continues to weaken, we draw comfort from healthy occupancies (>90%), recent rent reversions still higher than passing rents and zero devaluation risks given its prudent accounting policy. Our target price of S$12.00 (previously S$12.34) is pegged at 20% premium to end-FY10 base case RNAV of S$10.00 (previously S$10.28) and incorporates latest market prices for its listed subsidiaries. Reiterate BUY.

Mass-mid market buoyancy mitigates hospitality weakness. For the Mar – May 09 period, CDL sold 426 units from four mass-mid projects (i.e. Botannia, Ferraria Park, Livia and The Arte), exceeding the 368 units transacted for 2008. Progressive revenue recognition from these projects within the next two years should mitigate a drop in contribution from its Hotel segment. We expect CDL to leverage on the sustainable mass-mid market buoyancy, through clearing its unsold inventory for Livia and The Arte, as well as launching new projects such as the Albany and Hong Leong Garden sites within the next six months.

Prime projects to gather interest. Management is seeing increased enquiries and demand for its prime projects, evidenced by the sale of four units of St. Regis Residences over the past three weeks. We expect interest here to pick up along with the mass-mid market, which should benefit CDL given its healthy stable of prime projects, i.e. Cliveden, One Shenton and Shelford Suites.

Ammunition behind peers, but landbank ahead. While CDL’s S$577.1m cash lags the post-rights position of KepLand and CapLand, we believe its landbank of 7.4m sqf in GFA (Mass: 73%, Mid: 5% and Prime: 22%) does not warrant a salient need for further replenishments. Risks of provisions also appear low given low land acquisition costs. Current net gearing of 0.49x should be sufficient to tide through the current period, sweetened by recent refinancing secured for South Beach project.

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