Brokers' take: CDL set for turnaround through portfolio optimisation, say analysts

BROKERAGES are positive on City Developments Limited (CDL) C09, following its earnings results for the second half of the financial year ended Dec 31, 2021.

RHB, DBS Group Research, Citi and CGS-CIMB have maintained their "buy" calls on the property and hospitality group, as it works towards asset recycling and unlocking the value of its assets.

Its recent slew of acquisitions and divestments resulted in RHB analyst Vijay Natarajan raising his revalued net asset value (RNAV) estimates on CDL by 3 per cent in a report on Monday (Feb 28).

"CDL has been actively replenishing its Singapore residential land bank with acquisitions of 5 sites since last year, as strong sales momentum across its launches has depleted its inventory with an estimated unbilled sales of more than S$3 billion," said Natarajan.

He also anticipates a return on investment of more than 15 per cent, as the group redevelops the former Fuji Xerox Towers into an integrated development, tapping the Central Business District Incentive Scheme by the Urban Redevelopment Authority. Similar plans are also underway for Central Mall and Central Square, he added.

Furthermore, CDL will reap hefty gains from portfolio reconstitutions, such as through the divestment of Millennium Hilton Seoul that should result in a post-tax gain of S$529 million, observed Natarajan.

He also noted that Tanglin Shopping Centre, of which CDL has a 34.6 per cent stake, has received a successful S$868 million collective sale bid, which is projected to result in gains of more than S$150 million, as the assets are held on a historical cost basis in its balance sheet.

These portfolio movements resulted in an increase of RHB's target price to S$9.25 from S$9, derived from RNAV. This is despite the profit after tax and minority interest for FY2021 missing expectations, Natarajan said.

Meanwhile, DBS on Monday observed CDL is trading at "distressed valuations" of around 0.8 times the FY2021 price-to-net asset value (P/NAV) ratio, which the brokerage noted is even below the low seen during the global financial crisis.

The research house's target price of S$10.50, maintained from its previous report, is based on a 25 per cent discount to RNAV and implies 1.1 times the P/NAV ratio, which is around 0.5 standard deviation below CDL's average share price since listing.

DBS believes CDL's move towards unlocking hidden value of its "legacy assets" within its books via asset recycling or redevelopment has yet to be priced in and presents significant upside potential for its net asset value.

"We believe investors will eventually appreciate the stock as CDL realises more gains," it stated.

Citi analyst Brandon Lee on Friday gave CDL an unchanged target price of S$11.02 and sees a positive share price reaction on the real estate developer's higher-than-expected dividend per share, which includes the S$0.191 distribution in specie of CDL Hospitality Trusts' stapled securities.

He believes the proposed unit distribution will deconsolidate the trust from CDL, which enables it to book gains on future divestment of assets from CDL to the trust, with pro forma net gearing improving 12 percentage points to 49 per cent and including additional accounting gain of S$467.5 million.

As for CGS-CIMB, the brokerage on Friday raised its FY2022-2023 earnings per share estimates by 25.5-29.2 per cent to factor in the divestment gain from Millennium Hilton Seoul, stronger hotel contributions and income from new Singapore residential land bank.

Its RNAV-derived target price is maintained at S$8.97, as at the group's current share price, the market has largely factored in the impact of slower hotel operations.

Shares of CDL were trading down 1.8 per cent or S$0.13 at S$7.01, as at 11.33 am on Monday.

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