CITY DEVELOPMENTS LIMITED (C09) SGD 11.15

21/02/2019 Thursday Maybank KE Retail Research

City Development's 4Q18 headline net profit plunged 54.7% to $77.9m, taking FY18 earnings to $557.3m (+6.7%), missing estimates.

Excluding impairments and divestment gains, 4Q18 core earnings would otherwise grow by 17%.

For the quarter, revenue tumbled 40.6% to $788.3m due to absence of contribution from full recognition of The Brownstone EC, which obtained its TOP in Oct '17.

Gross margin however, improved 19.9ppt to 55.4% on changes in sale mix.

Other operating income dwindled to $0.6m (4Q17: $76.5m) in absence of divestment gains. In 4Q17, the group booked $52m gain from partial disposal of two China residential projects in Chongqing and another $30m from the disposal of a Tokyo office building.

Including JV projects, South Beach Residences and Forest Woods, property development contributed $103.1m (-41.7%) or 93% of pretax profit, despite making a $20.1m provision for two residential projects in Central London.

Segmental breakdown: *Property Development - Revenue: $196.9m (-74.1%), pretax profit: $103.1m (-41.7%) The significant decline was due to the full recognition of The Brownstone EC project in 4Q17, with sales coming primarily from New Futura, The Tapestry and Park Court Aoyama The Tower.

The 190-unit South Beach Residences, which was only soft launched in Sep '18, has sold 53 out of the 70 units released to-date at an ASP of S$3,450 psf.

The 716-unit Whistler Grand condominium at West Coast Vale has sold 260 out of the 300 units launched since Nov '18 at an ASP of $1,380 psf.

*Hotel Operations - Revenue: $452.9m (+0.6%), Pretax loss: $53.2m (4Q17: $1.4m profit) Despite ongoing refurbishment works, the group's hotel revenue contribution was relatively stable for the quarter.

However, it suffered a pretax loss following significant hotel impairments of $94.1m particularly in the US and full closure of the Mayfair hotel in Jul '18.

*Rental properties - Revenue: $102.8m (+19.4%), Pretax profit: $58.0m (+45.9%) The performance was bolstered by the contribution from two newly acquired London office buildings, namely Aldgate House and 125 Old Broad Street, contribution from Le Grove Serviced Apartments (re-opened in Jul '18 following a major revamp) and HLCC's retail mall (opened in Jun '18).

The stronger pretax profit growth was buoyed by higher contribution from First Sponsor and write-back for bond interest support for PPS2 platform.

Balance sheet remains solid though net gearing crept up to 31% (3Q18: 23%) after full settlement of its land tenders and acquisitions in 4Q18. If fair value surpluses of investment properties were accounted for, the net gearing ratio will be reduced to 23%.

Looking ahead, the group aims to launch three projects in 1H19, namely 154-unit Boulevard 88, 592-unit Amber Park and 188-unit Haus on Handy. Two other projects will be slated for release in 2H19 - 820-unit Sumang Walk and 680-unit Sengkang Central.

Meanwhile, ongoing refurbishment works for Orchard Hotel are expected to complete by 2Q19. As the hotel remains operational during the refurbishment period with phased room closures, revenue impact is not expected to be material.

In China, Distrii, a leading co-working company that the group has an equity stake in, will be the master tenant of its newly-acquired office block within Yaojiang International complex in Shanghai's prime North Bund Business District. An ongoing AEI is scheduled to complete by 1Q19.

The group has declared final DPS of 8¢ and special DPS of 6¢, taking full year payout to 20¢ (FY17: 18¢), which translates into yield of 2.1%.

At current level, City Dev is trading at 0.85x P/B.

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