CDL should consider splitting its business, listing a trust to realise shareholder value

THERE are several local companies that are over a hundred years old. Still, turning 60 marks a major milestone for any business.

Given its rapid growth, City Developments Limited (CDL), which turned 60 recently, has plenty to celebrate. 

The real estate company started as a housing developer with eight employees at a rented office in Amber Mansions along Orchard Road in September 1963. Today, CDL is a global group with over 8,000 employees. Its geographically diverse portfolio comprises homes, offices, hotels, serviced apartments, student accommodation, malls and integrated developments.

However, the stock is severely undervalued. CDL traded at 34 per cent below its end-June net asset value (NAV) per share of S$10 as at Sep 26. 

Helped by various divestment gains, CDL’s net profit jumped to S$1.3 billion for 2022, up from S$85 million for 2021. The group reported a loss for 2020.

Over 2022, CDL’s share price rose 20.9 per cent, outperforming the 8.5 per cent share price rise of real estate investment manager CapitaLand Investment . CDL’s share price has retreated this year, down 19.9 per cent year to date.

CDL’s net profit for the first half of 2023 fell 94.1 per cent to S$66.5 million. This was mainly due to the absence of significant divestment gains booked in H1 2022, as well as higher financing costs and impairment losses on its UK investment properties in the latest period.

Still, CDL’s business rides on many positives. The group has a solid reputation as a housing developer, and its projects here typically achieve strong sales. As at Aug 6, it has a launch pipeline of over 1,100 homes in Singapore. 

CDL’s hotel operations posted Ebitda (earnings before interest, taxes, depreciation and amortisation), excluding divestment gains and investment losses, of S$100 million for the first six months, up 69 per cent year on year (yoy). Revenue per available room in H1 rose 43 per cent yoy. Brighter days lie ahead for its hotels if business and leisure travel continue improving.

The group can also count on future profit contribution from asset rejuvenation and redevelopment initiatives at its long-held assets. Moreover, CDL is building scale in purpose-built student accommodation and the private rented sector, which are defensive property asset classes.

Revalued book value

However, CDL’s share price undervaluation needs addressing. CDL’s revalued NAV (RNAV) per share as at end-June is S$16.79, after factoring in fair-value gains on investment properties. The RNAV per share stands at S$18.97 if fair-value gains on investment properties and revaluation surpluses of the hotel portfolio were included. Thus, the share price’s discount to RNAV was between 61 per cent and 65 per cent as at Sep 26.

Arguably, the RNAV per share of S$18.97 best captures CDL’s true value. If CDL is available for sale, a buyer would expect to pay market value for the investment properties and hotels. Even this RNAV could be conservative, as it excludes potential profit from properties under development.

Perhaps, CDL will cheer its shareholders up by rewarding them with a bumper special dividend when it announces its full-year results. 

Splitting the business

However, to create lasting shareholder value, CDL should unveil a bold corporate restructuring plan. It can split its business into two. 

Listed vehicles are inefficient for owning property development businesses, as property development projects can have long gestation periods and development profit is lumpy.

CDL executive chairman Kwek Leng Beng and family, possibly working with partners, could privatise the group’s development business, hopefully at book value, which incorporates updated valuations of development land bank. 

Hong Leong Investment Holdings, where Kwek is executive chairman, owns an interest totalling about 49 per cent in CDL, according to CDL’s latest annual report.

Meanwhile, CDL’s investment property and hotel business can be held under a listed entity. Investment properties and hotels, respectively, accounted for about 43 per cent and 26 per cent of the group’s total assets of around S$31 billion as at end-June, if they were held on a fair-value basis.

In short, this means that CDL’s investment property and hotel portfolio is worth about S$21 billion on a fair-value basis. 

CDL is no stranger to the listed trust space here. It invests in CDL Hospitality Trusts and IReit Global , and owns interests in the managers of these trusts. 

With better market conditions, CDL could potentially launch a listed trust comprising its UK commercial assets. The group can also explore launching trusts that own its student accommodation or Singapore commercial properties.

However, what may work best is for CDL to hold its investment properties and hotels under a mega listed trust. 

With around S$21 billion of assets, the potential trust’s scale compares well with leading Singapore-listed trusts. The two biggest S-Reits by market capitalisation – CapitaLand Integrated Commercial Trust (CICT) and CapitaLand Ascendas Trust (Clar) – held investment properties of S$23.8 billion and S$17 billion, respectively, as at end-June.

Critically, a CDL mega trust can aspire to trade at around its mark-to-market book value. Based on unit prices as at Sep 26, CICT and Clar – which hold their investment properties at independent valuations – traded at 13 per cent discount and 19 per cent premium to end-June NAV, respectively.

Perhaps, the CDL mega trust could differentiate from other big listed trusts here that have external managers by adopting an internal management structure where the trust’s unitholders own its manager. 

Such a structure may better align the interests of management and unitholders, and possibly lead to superior unit trading performance. An internally managed CDL mega trust can also aim to earn fee income for its unitholders by managing third-party funds.

CDL has won numerous accolades for its property projects and sustainability initiatives. But the woeful share price needs rectifying. 

Hopefully, the solution is a restructuring that creates value for all shareholders and not a low-ball privatisation bid for the business by the Kwek family.

The writer owns shares in CDL.