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Analysts positive on CDL's divestment as property group now on 'repair mode'

Felicia Tan
Felicia Tan • 4 min read
Analysts positive on CDL's divestment as property group now on 'repair mode'
The analysts have given a range of target price estimates from $8 to $11.02 on CDL.
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Analysts from Bank of America (BofA) Securities, Citi Research, CLSA and Lim & Tan are all positive on City Developments Limited (CDL) after the group announced that it was divesting its entire stake in Sincere Property Group for US$1.

On Sept 10, CDL announced that it was fully divesting its 51% stake in the cash-strapped Chinese property group to an unrelated third party.

At the same time, Sincere will transfer the remaining 15.4% interest in Shenzhen Tusincere Technology Park to CDL as partial repayment of a loan still owed to the latter.

BofA analysts Donald Chua and Chan Xian Ning have kept “buy” on CDL with a target price of $8 following the news of the divestment.

See also: CDL pencils 1H21 net loss of up to $35 million, no thanks to the Covid-19 restrictions

To them, the divestment “closes this chapter” and that the closure should “remove a lingering overhang on the stock”.

“A full divestment also helps CDL avoid being engaged in a possibly long drawn bankruptcy reorganization of Sincere,” add the analysts in a Sept 13 report. “With this overhang removed, management can now focus on repairing its standing with investors, starting with driving operational recovery in its core markets.”

As it is, the divestment has no impact on Chua and Chan’s estimates as they had previously written the value of Sincere as zero in their model.

Looking ahead, Chua and Chan see “decent risk-reward” on CDL with the counter at a deep discount of 50% to its revalued net asset value (RNAV) or over -1 standard deviation (s.d.) below mid-cycle.

“An impending Singapore REIT (S-REIT) initial public offering or IPO (announced by CDL), redevelopments of Fuji Xerox Tower and Central Mall, and potential value unlocking from hotel divestments are some of the steps to be taken by CDL,” write the BofA analysts.

“Meanwhile, its residential presales in Singapore remains robust, with the recent 1HFY2021 results showing signs that the worst of the operational drag from hotels is behind us.”

Citi Research analyst Brandon Lee has, too, kept “buy” on CDL with a target price of $11.02 as the group focused on making a clean exit from Sincere.

The move, says Lee, could “finally narrow its RNAV discount”. According to Citi’s estimates, CDL is trading at a 55% discount to its RNAV versus its five-year mean of 25%.

The remaining financial exposure of around $85 million have already been written off earlier and is unlikely to impact CDL’s net asset value (NAV) per share.

“With Sincere now on the backburner, we expect CDL to focus on Singapore residential and hotel operations,” writes Lee in a Sept 12 report.

“Near term catalysts are better-than-expected take-up of 696-unit CanningHill Piers and successful listing of UK commercial REIT, with favourable outcome from Millennium & Copthorne’s (M&C) strategic review and lifting of residential policy risk as medium-term catalysts,” he adds.

CLSA analyst Wong Yew Kiang has upgraded his recommendation on CDL to “buy” from “underperform” with a higher target price of $9 from $7.52 previously.

Following the “stunning move”, CDL is now deemed as Wong’s top developed pick ahead of CapitaLand.

“The financial woes of Sincere have been a key drag on CDL’s share price and we view this announcement as a major positive catalyst for the stock to rerate,” writes Wong in a Sept 13 report.

The move also allays Wong’s earlier concerns of a drawn-out legal suit in a worst case scenario of Sincere’s liquidation and potential off-balance sheet debt at Sincere, he says.

Like the rest of the analysts, Wong sees catalysts in the form of a potential UK commercial REIT listing in Singapore, asset recycling for some of its hotel assets, and the eventual recovery of its hotel operations.

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Wong has kept his RNAV unchanged at $11.22 as he narrows his discount from 30% to 20%, tighter than its 25% average.

Finally, the team at Lim & Tan Securities have maintained “accumulate” on CDL with a consensus target price of $9.23.

To them, valuations for CDL are currently undemanding at 0.75 times.

“Given CDL’s significant exposure in the hospitality industry, a recovery of the sector on the back of ramping up in vaccination rates will bode well for the stock,” writes the team in a Sept 13 report.

Shares in CDL closed 36 cents higher or 5.4% up at $7.03 on Sept 13, making it the top counter in terms of value on the SGX.

According to CLSA’s estimates, CDL is trading at FY2021 P/B of 0.8 times with a dividend yield of 1.2%.

Photo: Samuel Isaac Chua/The Edge Singapore

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