Renewed M&C offer lifts CDL shares 5.9% higher

Singapore

CITY Developments Limited (CDL) shares got a sprightly start to the week on its renewed offer for all remaining shares in London-listed subsidiary Millennium & Copthorne hotels (M&C).

The mainboard-listed property developer's stock added S$0.50 or 5.9 per cent up at S$8.97 on a volume of 4.6 million shares, close to double the full-day average daily volume over the last 15 trading days.

On Friday, CDL announced a second takeover offer for M&C with a higher cash offer of 685 pence (S$11.86) per share, a 37 per cent premium over the five-year high of 500 pence prior to Friday's offer. M&C shares gained 35 per cent to close at 675 pence after the offer was made.

CDL's initial offer was made in October 2017 at 552.5 pence per share before being later revised to 620 pence per share. It lapsed in January 2018 after failing to get the minimum acceptance of more than 50 per cent - CDL received an acceptance of 47.2 per cent.

Analysts think that the revised offer will gain more traction with minority shareholders, some of whom felt that the previous offers did not reflect the value of M&C's property portfolio.

RHB Research Institute analyst Vijay Natarajan said: "We believe the latest offer is likely to gain a minority acceptance as it's a 10.4 per cent premium to the previous offer and comes at a time when market conditions have worsened considerably amid heightened trade war concerns and Brexit uncertainty."

DBS Equity Research analysts Rachel Tan and Derek Tan noted in a report: "This time, CDL has secured an irrevocable undertaking from key minority shareholders for (around) 43.65 per cent of the M&C shares it does not own, which puts the group closer towards achieving the conditions to take M&C private.

The parties that CDL secured an irrevocable undertaking from include International Value Advisers, MSD Partners and Classic Fund Management, who previously criticised M&C directors in 2017 for backing CDL's first offer of 552.5 pence per share.

That said, the renewed offer also bodes well for CDL. The DBS analysts wrote that the offer price represents an 18 per cent discount on M&C's last reported net asset value of 823 pence in Q1 FY2019, which makes the deal attractive for CDL as most of M&C's assets, which are hotels, are held at cost.

"The move is a long-term positive and should help CDL to better reposition its ageing hotel assets, but will also result in a significant increase in its near-term capital expenditure," Mr Natarajan said.

OCBC Investment Research's Andy Wong said that based on the research house's valuation of CDL using the revalued net asset value method, M&C is currently valued based on its market value (trading share price).

"Thus, we see potential upside to our fair value estimate of CDL should the privatisation exercise be successful and our valuation of M&C is based on its book value instead," he added.

Traders told The Business Times that CDL's share price may have also been given a lift due to growing optimism that the US Federal Reserve is looking at the possibility of rate cuts.

This has seen both an increase in trading volumes and prices in real estate investment trust (Reit) and property counters in recent sessions - some of the main beneficiaries of having lower borrowing costs.

DBS Equity Research has a "hold" recommendation with a target price of S$9.50 and RHB Research Institute has a "neutral" call on CDL with a target price of S$9.20.

Meanwhile, OCBC Investment Research, more bullish on CDL's outlook, has a "buy" rating and a fair value estimate of S$10.68.