• Keep BUY and TP of SGD7.30, 36% upside. Due to its relatively high gearing and low debt hedge position among developers, City Developments stands to benefit from the larger-than-expected interest rate cuts. With the pace of global real estate transactions expected to pick up, CDL is in a good position to divest sizeable assets by 4Q and possibly achieve its SGD1bn divestment target set earlier this year. A resilient hospitality segment provides additional tailwinds. CDL is trading at a deep >60% discount to RNAV.

• Financing cost burden could start to ease in FY25 from rate cut outlook. As of 1H24, CDL’s net gearing stands at 116% and 69% (if investment properties are based on fair value). It has total SGD12.1bn of debt, 25% of which is due for refinancing by 1H25. Only 40% of its debt is currently fixed with an average borrowing cost of 4.5% pa. About 50% of its debt is in SGD while the remaining are in GBP (29%), USD (8%), CNY (4%), JPY (2%) and others. The varied currency debt profile is to provide a natural hedge for the assets in key geographical markets which the group operates in. For 1H24, finance costs stood at SGD275m (+25% YoY) and accounted for c.40% of its gross profits. Based on our preliminary sensitivity analysis, a c.50bps cut will likely result in c.7% reduction in overall finance costs.

• Positive outlook for hospitality and living sector. CDL’s global hotel portfolio revenue per available room (RevPAR) rose 3% in 1H24, and for 2H24 the RevPAR outlook remains positive with its UK, France, and Europe portfolio hotels expected to benefit from the Paris Olympics spillover demand. Similarly, the demand-supply dynamics for its living sector portfolio in UK, Japan, and Australia remains positive. With a sizeable portfolio asset worth SGD 2.7bn in gross development value, we believe this sector is now ripe for a possible spinoff into a private fund vehicle or REIT portfolio.

• Resilient demand expected for its SG residential new launches. During 1H24, CDL and its JV associates sold 588 units with sales value of SGD1.2bn (1H23: SGD1.1bn). Overall, we estimate it still has unbilled residential sales of more than SGD4bn. It currently has a pipeline of five residential launches, with two of them – Union Square Residences and Norwood Grand – expected to be launched later this year. Demand is expected to be strong considering the lack of new launch supply in the sub-market.

• No changes to earnings estimate as we wait for greater clarity on interest rate trajectory. CDL has been making steady progress on its environmental targets but we see room for improvement in governance and earnings transparency. Its ESG score of 3.3 (out of 4.0) results in a 4% ESG premium. Key risks include a slowdown in Singapore economy, negative returns from overseas ventures, and resurgence in interest rates.

Source: RHB Research - 26 Sep 2024