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City Developments: Looking Overseas In Search Of Greener Pastures?
Last October, Singapore was engulfed with haze as its citizens sported N95 masks in a bid to filter out hazardous particles.
Many residents, including myself, wished for an overseas trip during that period to avoid putting our health at risk.
Similarly, if a company encounters a difficult business environment in one geographical segment, the firm can opt to expand into other parts of the world in search of greener pastures. City Developments (CDL) is an example.
CDL is a leading residential property developer and one of the biggest commercial landlords in Singapore.
CDL’s subsidiary Millennium & Copthorne Hotels (M&C) owns a global network of Hotels which includes the likes of Grand Copthorne Waterfront Hotel.
Cutting edge, yet undisputably stunning. CDL recent development W Hotel Singapore – Sentosa Cove.
CDL has displayed a proven track record of resilience and of emerging stronger from cyclical economic downturns.
However, until recently, CDL has seen its profits dip to its pre sub-prime 2009 levels.
Source: CDL's annual reports
Increasing headwinds are expected in the domestic residential space as both primary and rental markets continued to face a weakening demand. We note that island-wide vacancy rates had rocketed from 5.2 percent to 6.2 percent from 1Q13 to 4Q13.
The Singapore government is showing no signs of rolling back cooling measures, and the bulk of CDL’s profits derived from its property development activities.
Therefore, CDL, traditionally known as a proxy for the Singapore residential market, has been taking giant strides in its overseas diversification efforts to limit exposure from Singapore’s properties cooling measures.
New Growth Paradigm
With a solid balance sheet and low debt ratios, CDL has been acquiring properties in overseas market at an accelerated pace.
Valuation
1. Healthy Net Debt to Equity ratio of 25.5 percent, significantly lower than majority of its competitors.
2. Current price is 31 percent premium to net asset value (NAV) of $8.27 (Current Price $10.83).
Investment Merits
Strong balance sheet with cash and cash equivalents of $2.9 billion and healthy gearing ratio at 20 percent and net debt to equity ratio at 25.5 percent.
CDL has an extensive array of well-positioned sites with high human traffic, proximate to various transportation route and infrastructure as well as shopping malls. In 4Q13, CDL’s office portfolio enjoyed healthy occupancy rate of 96.5 percent , higher than market average of 90.1 percent.
CDL has a proven track record of resilience and of emerging stronger from periodic economic turbulence over the past five decades.
Investment Risks
Current price may seem overvalued at a 31 percent premium to NAV, significantly much more than its competitors which are trading at a discount to their NAV.
Limited upside in the real estate sector in Singapore, due to tighter regulatory constraints in recent years.
Market uncertainty when expanding into new frontiers.
SI Research Takeaway
Despite an uninviting short to medium term outlook, limited upside in the real estate sector in Singapore and its currently overvalued market price, CDL’s fundamentals are still relatively strong with good earnings track record.
A paradigm shift in focus to overseas markets coupled with its healthy debt ratios, an experienced management team and an array of investments properties built on strategic locations would give me the confidence when the price is more favourable.
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