City Developments kept at 'hold' despite trading at attractive valuations
SINGAPORE (Dec 11): DBS Group Research is reiterating its “hold” call on City Developments (CityDev) with a lower target price of $9.50.
This is despite the stock trading at attractive valuations at close to 2SD below historical P/NAV average.
In a Tuesday report, lead analyst Rachel Tan sees limited catalyst for the stock and sector given expectations of a property market slowdown, which historically implies that the stock will be trading in a range.
“Given the weakened sentiment in Singapore property, coupled with the group having the largest inventory of units for launch, we believe there could be limited positive catalysts,” says Tan.
Moreover, the margins of units from the land bank acquired in late-2017 to 2018 could be impacted given that the ability to raise property prices may be limited following a turn in sentiment.
In 4Q18, CityDev has taken advantage of opportunities from Brexit and invested in two landmark Grade A office buildings in London – Aldgate House and 125 Old Broad Street (formerly known as Stock Exchange Tower) – for $1 billion. This is in line with its 10-year target to achieve $900 million recurring EBTIDA.
“Its passing yield is 4.7-5.0% with medium-term growth potential by yielding up the properties and potential for positive rental reversions from its current under-rented leases,” says Tan.
The group’s management sees “tremendous potential” in this investment.
Currently, both properties are under-rented, with Aldgate House’s occupancy at 88% and 125 Old Broad Street is 100% occupied with weighted average unexpired lease term (to lease break) (WAULT) of above 5 years.
The analysts believes that the acquisitions will enhance the group’s recurring income portfolio as it works towards its 10-year target. Also, the properties could be recycled into a REIT or private fund platform.
“We will not be surprised to see more of such deals when the opportunity arises in the future,” adds Tan.
Nonetheless, potential catalysts include property sales remaining strong despite the change in sentiment and the group’s successful launch of its fund management platform.
As at 2.50pm, shares in CityDev are trading 17 cents of 2.02% lower at $8.25, giving it a FY19F price-to-book value of 0.7 times with a dividend yield of 1.9%.
