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SI Research: City Developments – Ready For A Turnaround
The Straits Times Index (STI) has performed well this year, adding over 400 points to break the 3,300 mark, a level that was last seen in mid-2015. The top performing STI component stock, Yangzijiang Shipbuilding (Holdings), made headlines as recovery in demand for new bulk carriers turned the worst performing stock in 2016 into the top performer this year.
Amidst the hype of the shipbuilders’ 92.6 percent year-to-date (YTD) share price gain, we take a look at the runner-up City Developments (CDL). We exclude Global Logistics Properties, which had already accepted an acquisition offer.
Shares of CDL, Singapore’s property pioneer with a rich history of over 50 years, registered YTD gain of 38.8 percent, reaching $11.50 on 14 August 2017. Since our previous coverage on CDL in November last year, the local blue chip’s shares have since advanced almost three dollars, or approximately 34.5 percent.
Signs Of A Revival
It is without a doubt that property developers have been hit, or rather the market ‘cooled’, by the slew of property cooling measures introduced by the Singapore government over the years.
However, in a surprise move early this year, the Singapore government relaxed some measures relating to the seller’s stamp duty (SSD) as well as the total debt servicing ratio framework. The SSD was first introduced in 2010 to clamp down on speculative property investments.
Although the bulk of current property cooling measures remain, we view this positively as the revised SSD, which has reduced the holding period as well as the rates payable, would certainly provide increased flexibility for property investments.
Recently, signs of a revival in the property market have emerged, as developers experienced an increase in sales volume and intense bidding for land bank. According to the Urban Redevelopment Authority, home sales jumped 72 percent during the first half from a year earlier as developers sold 6,567 units.
While it would be better to remain cautious and observe for more confirmation signs, a revival would bode well for CDL as the group stands ready with a robust balance sheet and war chest. In addition, the group has also been successful in recycling capital through its investment platform, a further indication that CDL is unlikely to face funding issues.
Growing Funds Under Management
Following the developer’s third Profit Participation Securities (PPS), CDL is now closer than ever to achieving its target of $5 billion in funds under management by end-2018. The PPS 3, which was successfully executed last year, allowed the developer to unlock value worth $977.6 million in Nouvel 18 while avoiding hefty penalties looming over the unsold units of the luxury condominium.
Since 2014, CDL has successfully launched a PPS each year. In line with the developer’s funds under management target, we could possibly see another PPS launched in 2H17.
Financial Performance
(Source: Shares Investment)
CDL’s 1H17 performance missed expectations as net profit came in 18.3 percent lower than that of 1H16. The decline in revenue and net profit was due to the absence of contributions from Lush Acres Executive Condominium for which profits were wholly recognized on completion in 2Q16. However, excluding the impact of Lush Acres, revenue and net profit would have increased by 12.1 percent and 7.4 percent respectively.
Despite the seemingly weaker first half, CDL could report better results for the full year should units of its freehold luxury project Gramercy Park, which must be sold by 23 May 2018, continue to experience a healthy demand. As at April this year, CDL has sold 80 percent of the apartments launched in the North Tower in phase one and a further 11 of 20 apartments released in the second phase for the South Tower.
Given the strong sales of Gramercy Park, the developer is ready to launch its new prime District 9 project, New Futura, a 124-unit condominium in the second half of the year.
Valuation
Based on CDL’s current share price of $11.50 and the net asset value per share of $10.25, the developer’s shares are currently valued at a price-to-book (P/B) ratio of 1.1 times, up from around 0.9 times in November last year.
Meanwhile, the group’s rival, CapitaLand, has its shares valued at a lower P/B of 0.9 times, inching up from 0.8 times during the same period.
That said, the main difference between the two developers is that CDL does not take into account revaluation of its investment properties, which could make a significant difference in its net asset value. Depending on whether the current valuations are higher or lower, CDL’s shares could be trading at a huge discount or premium to book value.
By doing so, CDL’s shares may face the problem of being “undervalued” by investors during a property up-cycle as it does not revalue its investment properties.
Nonetheless, investors interested in CDL should keep a look out on Singapore’s property market, which has a rather impactful influence on CDL’s share price.
