City Developments - Top pick: Multiple catalysts ahead


Assuming coverage with OUTPERFORM and S$12.00 TP (from S$12.25):

We believe that multiple catalysts lie ahead for CDL, with further upside likely being driven by:
(1) asset divestments to unlock portfolio value,

(2) positive sales momentum from past overseas investments,

(3) a pickup in Singapore residential sentiment in 2016, with the potential tweaking of residential policy measures, and

(4) a potential re-inclusion into the FTSE EPRA/NAREIT index.

We believe CDL has an underappreciated portfolio of investment properties; as of Sep-15, CDL's investment properties are held at S$3.1 bn vs our estimate of S$7.6 bn. In the near term, capital recycling initiatives should be a key catalyst to unlock value.

Given its status as a proxy to the residential market, CDL looks best positioned for a turnaround in the Singapore residential market sentiment in 2016, with current concerns overdone; assuming residential ASPs fall a further 20%, our RNAV only falls by 5%.

CDL is our top pick among the developers. We believe its valuation is attractive, at a 41% discount to RNAV and 0.79x P/B (-1.4 SD), especially with its assets held at historical costs.

Unlocking value through capital recycling
As of Sep-15, CDL's investment properties are held at S$3.1 bn vs our estimated value of S$7.6 bn. We estimate its Singapore office portfolio to be worth S$3.9 bn, with potential assets likely to include stabilised assets such as Republic Plaza (S$1.8 bn), Fuji Xerox Towers (S$600 mn) and Manulife Centre (S$360 mn).

We view this as a key catalyst for CDL, given it allows the company to:
(1) realise a healthy gain on divestment,

(2) crystallise value on its balance sheet through a narrowing of the discount to RNAV, and

(3) recycle cash proceeds for future investments.

Geographical diversification on track; await pickup in Singapore residential market sentiment
CDL has been accelerating its overseas expansion, with S$1.3 bn of overseas assets acquired in 2014. While overseas revenue (ex-M&C) was only 5% of group revenues in 2014, positive sales momentum from its overseas launches could validate CDL's diversification efforts. With market transaction volumes at a trough, CDL should be best positioned for a potential turnaround in sentiment in 2016, given its status as a Singapore residential proxy. Further, we believe currently concerns are overdone. Assuming residential ASPs would fall a further 20%, our RNAV estimate only falls by 5%.

Technical Analysis
Daily Chart
Top pick; current valuations are attractive
Valuations for CDL are attractive, at a 41% discount to RNAV and 0.79x P/B (-1.4 SD), especially with its assets held at historical costs. An initiation of buybacks under its current 10% buyback mandate will also be supportive of valuations, in our view. (Read Report)

Source : Credit Suisse Asia Pacific Equity Research

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