City Developments - Monetising Office Assets to Unlock Value

PPS 2.0: SGD1.1b worth of office assets
CDL has established its second Profit Participation Securities (PPS) with three office assets. We are positive as this would allow CDL to monetise SGD1.1b worth of office assets, conservatively held at cost. We expect gains of c.25 SGD cts per share and raise our RNAV by 2% to SGD12.52. This lifts our TP to SGD10.64, still at a 15% discount to RNAV. Maintain BUY.

Retaining 40% for future gains
CDL will hold 40% of the PPS and Alpha Investment Partners, Keppel Land’s fund-management arm, 60%. The partners will contribute SGD133.3m and SGD200.2m respectively and receive fixed coupons of 5% pa for five years. Including the fixed payout, Alpha will receive preferred returns for an IRR of 12.6% pa. CDL will receive the balance cashflow until its initial capital is repaid. Subsequent upside will be shared 60:40 by CDL and Alpha. This means that CDL will continue to benefit from future gains after delivering the promised returns to Alpha.

Aggregate valuation above our estimates
The three office assets in the deal - Central Mall (office tower) (SGD218m), 7 & 9 Tampines Grande (SGD366m) and Manulife Centre (SGD487.5m) - have been valued at SGD1,071.5m. Occupancy is 98% and they will continue to be managed by CDL.

Technical Analysis
Daily Chart
Raise RNAV to SGD12.52, discount could narrow
We lift our FY15 EPS by 44% to factor in expected gains from this. Proceeds will free up capital for future deployment and lower CDL’s leverage to 0.21x from 0.29x as of Sep 2015. As the transacted value is 17%/32% higher than our FY15-16 estimates, we lift our RNAV by 2% to SGD12.52. We believe the stock’s 42% discount to RNAV could narrow from this positive development. (Read Report)

Read Related Reports
1) City Developments - Hitting the right notes by DBS Group Research, published on 16 December 2015

2) Idea Of The Day - City Developments by Lim & Tan Research, published on 16 December 2015

3) City Developments - Landmark commercial PPS transaction by CIMB Research, published on 15 December 2015

Source : Maybank Kim Eng Research

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