City Development - Results lifted by divestment gains (DBSVickers)

HOLD S$10.14 STI : 2,850.59

Price Target : 12-month S$ 11.24 (Prev S$ 11.41)

Reason for Report : 2Q11 Results/ Lowering TP

Potential Catalyst: Good take up rates at new launches

DBSV vs Consensus: Above with inclusion of divestment gains

• 2Q11 results lifted by divestment gains

• Residential and hotel to support medium term growth

• Maintain Hold, TP lowered slightly to $11.24

Lifted by divestment profits. City Dev reported a 17% y-o-y rise in net profit to S$220.9m despite a 0.2% decline in revenue to S$979.4m, thanks to higher divestment profits and better associate contributions. The group recognized S$82.6m of profit before tax (vs S$8.9m previously) from the disposal of The Corporate building as well as Studio M Hotel to CDL HT. Associates’ contributions were also lifted by share of negative goodwill. Operations-wise, hotels continued to grow with a 6.3% improvement in global Revpar (constant currency terms) primarily driven by room rate hikes in London, S’pore and New York. This helped partially offset the dip in residential development income. The group recognized billings from projects sold in previous years such as Cliveden at Grange, Hundred Trees, Volari, Treehouse, 368 Thomson and Cube 8. No profit was recognized from 809 units sold in 1H11 valued at S$793m. An interim DPS of 5Scts has been declared.

Residential profits and hotel to underpin profit growth. Looking ahead, the group has locked in strong residential presales in 1H11, which will underpin profits in the medium term while expecting hotel operations growth to remain positive but moderated in view of the uncertain global picture. It plans to launch 500 new units in 2H11 including high-end developments such as Nouvel 18 (50 units) and Lucky Tower redevelopment (50 units). It continues to adopt a cautious and selective stance towards landbanking. Its current residential landholdings comprise 2.5msf GFA, which could potentially last over the next 2-3 years.

Maintain Hold. We like City Dev’s quick asset turn strategy to lock in development profits. However, valuations at 10% discount to our RNAV of $11.24, adjusted for the latest share price of quoted holdings, appear relatively expensive, in view of the recent govt announcement to raise income ceiling for primary public housing purchase, which is likely to draw away some demand from the private mass housing market. Maintain Hold, with TP of S$11.24.