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.

Suntec REIT - Raises stake in Suntec Convention (DBSVickers)

BUY S$1.38 STI : 2,850.59

Price Target : 12-Month S$ 1.69

Reason for Report : Company update

Potential Catalyst: Organic growth and accretive acquisitions

DBSV vs Consensus: Slightly below

• Takes effective 60.8% stake in Suntec Convention

• Accretive deal but impact depends on extent of AEI

• Maintain Buy and S$1.69 TP

Takes an effective 60.8% stake in Suntec Convention Centre. Suntec has announced it is buying a 51% stake in Harmony Partners Investments Ltd, which owns 80% of Suntec Spore International Convention Exhibition Centre for S$114.75m. Including its earlier 20% interest in the development, the deal will give the group an effective 60.8% stake in the convention centre. The vendors include Bright Assets Enterprise, Crescendo Investments, KCY Investments and Clavon Capital. The acquisition value is based on the latest valuation (by Colliers International) of S$400m for the property (vs the purchase valuation of $235m in Aug 2009). Suntec Convention comprises about 1msf of floor space spread over 6 levels.

Deal seems fair but accretion quantum depends on extent of AEI. We see the deal as accretive to Suntec given that the S$400m translates to an implied value of S$400psf for the prime floor space. Gaining majority ownership of the property would also enable the group to conduct AEI activities to improve the usage and efficiency of the property together with adjoining Suntec Mall more easily. However, the extent of the accretion would depend on further details on the potential AEI initiatives and capex required during this period. Suntec intends to fund the acquisition through debt, which will raise their see-through gearing to 41.6%, slightly ahead to the Sreit sector gearing level. In terms of immediate impact, there will be a boost to its book NAV from S$1.804 to S$1.87 given the higher value of its initial 20% stake, post revaluation. In addition, the greater ownership and contributions would increase its DPU by 1.2%.

Maintain Buy. We are retaining our Buy call on the stock. Suntec offers FY11 and FY12 DPU yield of 6.6% and is trading at undemanding 0.77x P/Bk NAV. Maintain Buy with TP of S$1.69.

Otto Marine Ltd - Underperforming in all segments (CIMB)

UNDERPERFORM Maintained

S$0.15 Target: S$0.17

Mkt.Cap: S$276m/US$228m

Offshore & Marine

• Below, maintain Underperform. Excluding fair-value changes from hedges and forex gains, 2Q11 core net loss of S$36.3m (vs. core net profit of S$37m in 2Q10) was larger than consensus and our expectations. All operating segments underperformed. We now expect Otto to post a core net loss of S$16.8m for FY11 (vs. our earlier forecast of S$34.3m core net profit). With limited shipbuilding orders visibility, we also slash our FY12-13 earnings estimates by 75-85%. Our target price is reduced from S$0.19 to S$0.17, still based on 0.8x CY11 P/BV. Despite a 60% fall in its share price YTD, our rating remains an UNDERPERFORM due to i) concerns over the viability of the cancelled Mosvold orders, ii) heightened financial risks, iii) the dry spell in shipbuilding orders and iv) consensus estimates downgrade. De-rating catalysts include weaker-thanexpected contributions from charter and specialised offshore services.

• Underperforming in all segments. The weak 2Q11 results were mainly caused by: i) the larger-than-expected reversal of profits owing to two cancelled Mosvold vessels (S$22m-24m); ii) successive seismic division losses of S$2.2m from increased mobilization and iii) lower charter profitability due to lower utilisation from an over-expanded fleet. Shipbuilding continued to strain the balance sheet, with its S$95.8m of operating cash outflow in 1H. Consequently, net gearing deteriorated to 1.5x (FY10: 1.0x).

• No excitement over proposed sale. Otto entered into a LOI (letter of intent) to sell its first cancelled Mosvold vessel (28,000 bhp AHTS) for US$90m. While the selling price appears to be attractive (our estimates were US$85m), there is a possibility that the vessel could be leased back. Hence, the proposed disposal may be nothing more than a sale-and-leaseback transaction. This is hardly inspiring, in our view.