EUR 850.00 For Business Accounts Only

Morningstar | Impairments for its Hotels and London Projects Weigh on City Developments' 4Q Result

City Development’s fourth-quarter result was weaker against a comparatively strong period last year. Last year’s result included revenue from the entire Brownstone project and partial divestment of two Chongqing projects. This result also included an impairment charge of SGD 94.1 million for its hotel operation and another SGD 20.1 million impairment provision for its two Central London projects. The latter is likely the projects in Belgravia and Knightsbridge and are small relative to the context of the group. For the group’s hotel operation, the result was impacted by closures and refurbishments but largely steady on last year. There is little in the result that alters our view on City Developments and we continue to see the company as undervalued relative to our unchanged fair value of SGD 12.70. With the residential market in Singapore likely to remain subdued after the implementation of restrictive measures by MAS in July last year, we do not see any near-term catalyst which will see its share price converge toward our fair value. Dividend yield of 2.1% is low relative to peers.

We remain of the view that a recovery in the Singapore residential property market will be a key catalyst for the group’s share price. The developer is positive on the residential market in Singapore in the long term and continues to participate in land auctions. However, management is prudent in land auctions given the still-high level of competition. Preference is for government land sales instead of en-bloc projects with the high asking price for en-bloc sales making the project returns unattractive. Residential projects launched in 2018 were well received and current unsold inventory is low. Five projects are expected to be launched in 2019.

The developer is also continuing its transformation in bolstering its recurring income to 65% of group earnings and the funds management business is targeting asset under management of SGD 5 billion by 2023. Further acquisitions are likely though management noted additional investment properties of good quality are hard to come by. For the three profit participation securities, or PPS, maturing over the next few years, a number of exit options are being considered but City Developments has no commitment to acquire the properties. An office property under PPS 2 was divested and discussion for potential buyers for the two office properties under the structure is ongoing. The office property market in Singapore is supportive of a sale given the low level of new supply. For PP1, the maturity of the scheme is likely to be extended for the service residence component while the hotel component is likely to be divested.