City Developments - Lacklustre quarter

■ 3Q15 net profit down 16% yoy to S$106.4m, on the lower end of expectations, dragged by lower residential and hotel contributions.

■ Slack likely to be filled by ramping up overseas residential and rental income.

Maintain Add with an unchanged RNAV-backed target price of S$10.47.

Drag from lower residential and hotel earnings
City Dev reported a 16% decline in 3Q net profit to S$106.4m on a 38.8% drop in revenue to S$809.3m. The results were on the lower end of our expectations, accounting for 18% of our FY15 forecast. The drag came from slower residential profits due in part to a high base in 2014, and weaker hotel contributions. This was partly offset by higher associate and JV contributions and a slightly lower effective tax rate.

Residential earnings decline from previous lumpy contributions
The 36% yoy decline in residential PBT was due in part to a high base in 2014, when 100% of the contributions from the Blossom Residences EC was recognised in the previous quarter. Projects that added to earnings in 3Q15 include previously launched Echelon, Bartley Ridge, Coco Palms, D’Nest, Haus @ Serangoon Gardens. As a result, PBT margin in 3Q was a commendable 28% vs. 13.2% in the previous quarter.

Weaker Revpar and higher cost bite into hotel profits
Hotel operations saw a 32% decline in PBT to S$59.2m with PBT margin slipping 6.2% pts to 13.5% due to weaker Singapore and other Asia hotel performance and pressure from higher operating costs. Global Revpar fell 1.4% yoy to £77.66, with Singapore and the rest of Asia Revpar slipping 7.5% and 10.9%, respectively. To unlock value from its hotel real estate, it plans to redevelop some US hotels and Seoul land parcel and undertake AEI for its Auckland property, over the next 2-3 years.

Overseas residential and rental income ramping up
While Singapore take-up was slower with The Brownstone EC (45% sold) and The Criterion EC (5% sold), we anticipate overseas residential contributions to accelerate in FY16. Eling Residences is scheduled for launch in Nov and completion next year, while 381 residential/SOHO units in Suzhou are sold and to be handed over in 2016. It will book in profits from the sale of Emerald House in Croydon in 4Q15. Rental income should be boosted by South Beach where the office tower is 96% leased.

Technical Analysis
Daily Chart
Maintain Add rating
We maintain our Add call with an unchanged target price of S$10.47, premised on a 25% discount to RNAV. At the current price, City Dev is trading at an attractive 0.8x P/BV and 45% below our RNAV. Catalysts could come when the group starts realising profits from its overseas development projects. (Read Report)

Read Related Reports
1) City Developments - Diversification to pay dividends by DBS Group Research, published on 13 November 2015

2) City Developments - Soft quarter by Maybank Kim Eng Research, published on 13 November 2015

3) City Developments - Attractively-Priced Now by RHB Research, published on 13 November 2015

Source : CIMB Research

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