SINGAPORE (May 29): RHB Group Research analyst Vijay Natarajan is upgrading City Developments (CDL) to a “buy” from the previous “hold” with a lower target price of $9.50 as the stock trades below global financial crisis (GFC) levels. 

While CDL, like all other property heavyweights in Singapore, has been affected by the ongoing Covid-19 pandemic, Natarajan believes most of the near-term headwinds have already been priced in. Furthermore, CDL’s solid fundamentals are likely to enable the company to bounce back. 

“The slow but steady recurring income build-up, strong balance sheet, and brand name, coupled with an experienced management team, should help CDL emerge stronger from the crisis,” says Natarajan. 

In particular, Natarajan notes that CDL’s hospitality portfolio has been hit the hardest, with nearly half of its 152 Millennium & Copthorne Hotels still closed. 

Although portfolio revenue fell 27% in 1Q, Natarajan says revenue is expected to “fall sharply” in 2Q amid worsening global conditions. 

“The group has taken various steps to contain costs – including pay cuts of up to 30% and trimming headcount by 8%,” notes Natarajan. 

“While the near-term outlook for the hotel sector remains gloomy, we believe the cost containment measures and targeted capex should position CDL well for a potential rebound in 2021,” he adds. 

The brokerage has, however, revised its FY2020-21F earnings by 18-28% to factor in “sharply lower income” from the company’s hotel segment, as well as the deferment of residential sales. RHB has also raised its RNAV discount to 45% from the previous 40% to factor in higher risks amid the prolonged Covid-19 outbreak. 

CDL has also outperformed its peers in what Natarajan terms to be a “challenging Singapore residential market” - booking increases of 40% and 49% in unit sales and sales value in 2019. In addition, the group currently has an unsold inventory of some 1,476 units, with another 1,800 units in its launch pipeline. 

“While near-term sales and prices are expected to face pressures, the recent six-month extension of additional buyer’s stamp duty deadline has provided temporary relief,” says Natarajan, adding that the strong brand name and good project attributes should help mitigate the overall impact. 

On an acquisition front, CDL has moved to increase its stake in Sincere Property and IREIT Global to 51% and 20.9% respectively in attempts to diversify its income stream. 

“These recent acquisitions show management’s confidence and commitment to long-term investment plans,” says Natarajan. 

He also notes that after factoring in fair value gains, CDL’s net gearing stands at 0.44 times, with a healthy interest cover or 6.2 times. 

As at 10.46am, shares in City Developments are trading flat at $7.67.