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Brokers' take: RHB upgrades CDL to 'buy', OCBC maintains 'buy'

BROKERS RHB and OCBC on Tuesday issued "buy" ratings for City Developments Limited (CDL) on the back of its launch of condominium project The Tapestry this weekend, and sentiment that Singapore's residential market is on the cusp of recovery.

RHB has upgraded its call on CDL from "take profit" to "buy", with a revised target price (TP) of S$15 from S$11.30 previously. This TP represents a 13 per cent upside to CDL's current price of S$13.30.

Meanwhile, OCBC is maintaining its "buy" rating on the stock with a fair value estimate of S$13.25.

As one of the largest residential landbank owners in Singapore, CDL remains the best proxy for investors looking to ride onthe residential segment's recovery, RHB analyst Vijay Natarajan said in a research note.

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"While it has been fairly aggressive in recent land bids, we believe its strong brand positioning and established track record should aid in its projects commanding premium prices."

RHB understands that the launch price of CDL's 99-year leasehold development The Tapestry located in Tampines, is expected to be about S$1,300 per square foot (psf), which translates to a healthy margin of more than 20 per cent.

Similarly, OCBC analyst Andy Wong noted that CDL intends to launch The Tapestry project on March 24. According to CDL, more than 5,000 people visited the show flat in the first weekend of the preview on March 10-11, with strong enquires received.

"This is not surprising, as The Tapestry is the first major private condominium launch of the year amid recovering sentiment in the residential sector," Mr Wong said.

He added that OCBC has assumed an average selling price of S$1,250 psf in their model, and believe this premium is achievable, given improving market sentiment and CDL's strong reputation.

"CDL continues to be one of our top picks within the property sector, as we view it as a key proxy to the Singapore residential market recovery story."

In addition, RHB believes that fund management would be the next key growth driver for CDL.

The property developer is targeting to achieve assets under management of US$5 billion under its fund management platform by 2023. This target does not include its existing profit participation securities (one-off, closed-ended fund structures) and Reit platforms, but mainly consist of capital from third parties, RHB said.

The company in January appointed a new chief investment officer, Frank Khoo, who will be in charge of growing the group's fund management business. According to RHB's estimates, this business once established, could significantly boost CDL's recurring income by about S$50 million per annum, or 9 per cent of its FY17's net profit.

Separately, the broker added that the outlook for CDL's 65 per cent-owned listed subsidiary, Millennium & Copthorne Hotels (M&C), is positive with strong global economic growth providing tailwinds for the hospitality sector.

"While CDL did not succeed in its recent privatisation bid, management remains optimistic on its prospects and would look at increasing its stake, if the right opportunity arises," RHB said.

With net gearing at a historical low of 9 per cent, CDL also has a debt headroom of more than S$5 billion for acquisition opportunities, with management noting that Singapore would remain a key focus market for acquisitions in the near future, the broker said.

Taken together, RHB believes that key catalysts for the counter include a stronger-than-expected rebound in Singapore residential property prices, and yield-accretive or sizeable merger and acquisition transactions.

However, a key risk could be the introduction of additional property cooling measures.

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