City Developments should explain how it will manage its buybacks as it grows its business

WHEN City Developments Limited (CDL) tumbled below S$6.00 last month, I thought it might be time to buy the stock.

The company’s board and management evidently felt the same way. On Mar 8, CDL said it had initiated a share buyback programme.

“Global equities have been hit by macroeconomic headwinds, resulting in depressed valuations. Our share buyback programme demonstrates our confidence in CDL’s strong fundamentals and growth potential,” said the company’s chief executive Sherman Kwek.

Since Mar 8, CDL has spent nearly S$30.4 million repurchasing more than 5.1 million shares in the market. This translates to an average price of S$5.92 per share.

The share buybacks accounted for just over 22 per cent of CDL’s total traded volume.

The company closed last week at S$5.91, up 4.1 per cent since the share buyback programme started. The benchmark Straits Times Index was up 1.3 per cent during the same period.

Ironically, CDL’s share buyback programme has put me off the idea of buying the stock. For one thing, I am not keen on competing with CDL for its own shares.

It is also not clear to me that CDL should be returning more cash to its shareholders at this point. With interest rates elevated, financing costs have risen significantly for property developers and real estate investment trusts.

CDL ended last year with net gearing of 103 per cent, up from 84 per cent at end-2022.

Moreover, a key reason CDL’s shares have been trading at depressed valuations is that the group’s core profitability has waned over the years – much like most other property development groups.

This column has previously pointed out that CDL’s return on equity (ROE) sank into low single digits during the decade leading up to the pandemic. Last year, CDL delivered an ROE of only 3.5 per cent – despite the group’s solid operational performance.

For 2023, CDL reported a 50 per cent rise in revenue to S$4.94 billion – driven by its core property development business, which more than doubled its revenue to S$2.79 billion.

The group’s net earnings declined 75.3 per cent to S$317.3 million, due in large part to substantial divestment gains chalked up in 2022. Excluding all divestment gains and impairment losses, CDL would have achieved a 301.3 per cent increase in net earnings to S$188.6 million.

Some analysts said CDL’s core financial performance for 2023 did not meet their expectations due to weak margins and high borrowing costs.

Without a sustained improvement in CDL’s underlying profitability, a share buyback programme may do little more than provide a temporary boost to the market value of its shares.

Creating shareholder value

To be clear, I am not suggesting that CDL’s shares are not attractively priced; or, that CDL should not repurchase its shares as part of a broader strategy to unlock value.

One of the biggest problems with share buybacks is that companies often launch these exercises without their boards and management clearly communicating what they believe their shares to be worth.

The result is investors not having a clear sense of whether a share buyback programme is really creating value.

This is not the case with CDL. By the company’s own estimation, its revalued net asset value (RNAV) at the end of 2023 was S$19.46 per share.

“Our shares are trading at a 70 per cent discount to our RNAV, and by acquiring our shares at value-accretive prices, it presents an attractive opportunity to deploy our capital into our portfolio which we know best,” said Kwek, when CDL unveiled its share buyback programme on Mar 8.

“This move signals our commitment to strengthen our alignment with our shareholders,” he added.

CDL’s existing share purchase mandate allows it to buy 10 per cent of its outstanding shares – which translates to more than 90 million shares. Based on CDL’s last closing price, the total value of the current share buyback programme could be more than S$500 million.

Kwek said during CDL’s 2023 results briefing last month that he is targeting divestments of S$1 billion this year.

By monetising assets and using a portion of the proceeds to buy back shares at a deep discount to RNAV, CDL could create significant value for its remaining shareholders.

Buybacks versus growth

The big question is how far CDL can take such a value-unlocking manoeuvre.

This is arguably not the best of times for CDL to be monetising its best assets, given that currently elevated interest rates may deter many potential buyers.

Even if CDL succeeds in divesting some assets at decent prices, the group would face the dilemma of whether to use the proceeds to repurchase its shares to narrow the discount at which they are trading to RNAV, or to acquire new assets that may drive its RNAV higher over time.

CDL certainly does not appear to be having any difficulty finding interesting assets. Last year, it spent some S$2.4 billion on acquisitions and investments in Singapore, Australia, Japan, China, South Korea and the United Kingdom.

Among the more significant deals was the purchase of St Katharine Docks in London for £395 million (or about S$636 million). The 23-acre freehold mixed-use estate fronting the Thames comprises more than 500,000 square feet of offices, residences, restaurants and shops. It also includes a marina with berths for up to 185 yachts.

CDL also acquired 25 freehold residential assets in Japan for 35 billion yen (or about S$321.9 million) last year. These properties comprise a total of 836 units, including four retail units.

Closer to home, CDL won a residential development site in Woodlands for S$294.9 million. It was also part of a consortium that won a separate residential site in Toa Payoh for S$968 million.

Earlier this month, CDL was reported to be close to sealing a deal to buy the Hilton Paris Opera hotel from Blackstone for 244 million euros (or some S$356 million). The property is located next to the Paris Saint-Lazare train station, and a 15-minute walk from the Eiffel Tower.

In a market where many companies have been taken private for less than their book values, CDL’s share buyback programme is a rare expression of fidelity to minority investors.

To provide a lasting boost to the market valuation of its shares, the company should perhaps offer more information on how the buyback programme will be managed alongside its plans to expand its portfolio of assets and take on more development projects.