Brokers maintain ‘buy’ on CDL despite investor reservations over strategic review

[SINGAPORE] Brokers retained their positive calls on City Developments Ltd (CDL) following its much-anticipated strategic review, as potential interest savings and gains from asset sales underpin their optimism despite a lukewarm investor response.

The counter has come under pressure since the property giant unveiled the outcome of its review on Monday (Sep 28), with RHB analyst Vijay Natarajan noting in a Wednesday report that its shares had fallen about 10 per cent since the announcement.

CDL shares were trading 0.1 per cent or S$0.01 lower at S$7.42 as at 3.55 pm on Wednesday, representing a discount of about 31 per cent to its net asset value (NAV) per share of S$10.74 at end-June.

The review broadly met expectations but “failed to excite the market”, said Natarajan.

“Based on investor feedback, key gaps are a lack of return on equity (ROE) targets and lack of clarity on the hospitality portfolio, China asset allocation strategy, as well as execution risks.”

Citi Research’s Brandon Lee similarly noted that most investors the brokerage spoke with were disappointed by, among others, a potential earnings dilution from divestments, and the allocation of 30 per cent of investment capital to China and Japan.

On the investment capital allocation, Lee said that investors cited a weak macroeconomic backdrop in China and rising interest rates in Japan.

“Nonetheless, we think most of these concerns are addressable, and concrete evidence of CDL executing some of the… key initiatives ahead should be a key catalyst.”

Natarajan said the review had laid out a clearer road map for divestments, fund-management growth, gearing and profit growth. “We see the current weakness as an opportunity to accumulate.”

Under its three-year growth strategy, CDL plans to divest S$6 billion of assets and invest S$5 billion over FY2027 to FY2029.

It is targeting more than S$1 billion in profit attributable to shareholders from disposal gains, with an annual dividend payout of at least 35 per cent of reported profit.

Net gearing, based on the fair value of investment properties, is targeted to fall to about 55 per cent by FY2029, from 75 per cent as at end-June. More than S$6 billion in expected cash inflows from property development sales will support debt reduction.

The group also aims to double its assets under management to S$10 billion by FY2029, supported by a dedicated fund-management entity and leadership team.

“The key change is CDL’s shift away from broad portfolio growth towards more measurable capital recycling, lower leverage and higher capital efficiency,” said DBS Group Research analyst Tabitha Foo.

She added that management incentives are now better aligned with shareholder returns, with senior management remuneration assessed against measures including total shareholder return, earnings per share and return on average capital employed.

Citi Research, DBS Group Research and RHB maintained their “buy” calls and target prices of S$11.53, S$12 and S$11.20, respectively.

CGS International (CGSI) reiterated “add”, with an unchanged target of S$12.11.

The target prices imply discounts of:

• Roughly 33 to 38 per cent to CDL’s revalued NAV per share of S$17.94 as at end-June, which factors in fair-value gains on its investment properties; and
• About 40 to 44 per cent to the group’s revalued NAV of S$20.09 per share after accounting for the fair value of investment properties and hotels.

Citi expects the earnings impact of the group’s S$6 billion disposal programme to be muted. Lee estimated that more than S$100 million in debt-cost savings, based on about S$3.3 billion in debt reduction at a financing cost of 3.4 per cent, “should almost fully neutralise earnings loss” from asset sales.

The estimate assumes yields of about:

• 3 per cent for hotels;
• 4.5 per cent for three UK offices;
• 4.5 per cent for Australian privated rented sector assets; and
• 4 per cent for other assets.

CGSI analysts Raymond Yap and Tan Jie Hui also see scope for a positive earnings impact even without disposal gains.

“The loss of income from mature assets divested could be compensated by the absence of losses from the sale of underperforming assets and interest cost savings,” they said.

Citi forecasts ROE of 4 to 5 per cent over FY2026 to FY2028 without divestment gains. Lee said that this could rise to 7 to 8 per cent if CDL achieves its S$1 billion divestment-gain target.

Hospitality core in focus

The group is eyeing around S$1.8 billion of hotel disposals over the three years. It directly owns 54 hotels valued at around S$8.6 billion.

Lee said that CDL “would have wanted to sell more than the target S$1.8 billion of hotels, though this could be potentially expanded from another S$1.8 billion currently slated for enhancement”.

He added: “There’ll be some divestments in the US, UK and France, with it basing its divestment decision on market value, operational performance and scale, but it isn’t sure if it would fully exit the US one day.”

S$5 billion investment programme

CDL plans to allocate 60 per cent of its S$5 billion investment programme to Singapore, 30 per cent to China and Japan, and the balance to other markets.

Lee noted that the group’s future investments in China will depend on sales performance at its Xintiandi project in Shanghai, where the high-rise component is expected to launch in December.

Although CDL has been shown many sites in central Shanghai, its next potential acquisition may come only in 2028 or later, he added. The group prefers residential investments, with the next potential acquisition likely to involve partners.

Lee also reckons that CDL may need to divest some existing Japanese assets to fund new investments.

He added that these could include its Japanese private rented sector portfolio of about S$700 million, which falls outside the S$6 billion divestment programme, and the Millennium Mitsui Garden Hotel Tokyo.