City Developments Limited (KimEng)

Event:
After being shelved for three years, construction work at South Beach has started and is scheduled for completion in 2015. Malaysialisted IOI Corporation is now onboard and will hold a 49.9% stake in this mega project, with City Developments (CDL) holding the remaining 50.1%. We believe it is timely to revisit this iconic development and review our assumptions, given an increase in our RNAV estimate by 11 cents a share. Maintain BUY.

Our View:
Based on the URA’s Written Permission issued in March, South Beach will comprise 644,871 sq ft of office space, 60,924 sq ft of retail space, 701 hotel rooms and 180 residential apartments. Compared to the Provisional Permission granted in 2009, the retail GFA has been reduced by 60% while the number of residential units has been increased from 171. We believe this is a wise move considering that South Beach is located between Raffles City and Suntec City, which together already have 1.2m sq ft of retail space.

We have increased our valuations based on higher capital value assumptions, mainly for the office and residential components, which we now value at $2,500 psf each, after taking into consideration the valuations of MBFC and Marina Bay Suites. We estimate South Beach to have a Gross Development Value (GDV) of $3.15b, which compares favourably to the total development cost which we estimate at $2.7b.

Following the restructuring, CDL’s exposure to South Beach has increased from the original 33% to 50.1%, indirectly raising the group’s overall exposure to non-residential property. Nonetheless, CDL may still continue to divest other non-core commercial assets, at the appropriate price, to unlock shareholders’ value.

Action & Recommendation:
Maintain BUY with a target price of $13.45, now pegged at parity to RNAV as headwinds remain in the residential property segment. However, this will be mitigated by CDL’s improving recurring income from its investment and hospitality properties.