SINGAPORE (Dec 12): Phillip Capital is maintaining its “accumulate” rating on City Developments (CityDev) with a target price of $12.10, after the group announced its final takeover offer for the remaining shares of Millennium & Copthorne (M&C) it doesn’t own.

In a Tuesday report, analyst Dehong Tan notes that the new offer of 620 pence per share is 12% higher than previously, and represents an attractive value for CityDev as it is pegged to 0.75 times book value despite it being at a 39% premium to the pre-offer last close price.

The privatisation of M&C is to be RNAV-accretive to CityDev if the deal goes through, adds the analyst, who calculates that the consolidation will lift CityDev’s RNAV by about 10.6% to $15.75 per share with a corresponding adjusted target price of $13.39.

Tan says he remains positive on CityDev regardless of whether the privatisation goes through, as CityDev already owns a majority 65% stake in M&C.

While the successful privatisation of M&C will result in a nimbler company and “tremendous monetisation potential”, in Tan’s view, he opines that the offer would have provided reasonable support to the trading price of M&C such that it is unlikely prices will fall back to the pre-offer valuation of 0.55 times NAV.

“Due to the intensive capital requirement and low-returns nature of the business, M&C has historically traded at a sizable discount to its book. Even with its hotels carried at cost, the highest valuation M&C traded at in the past decade post GFC was still a 7% discount to book. Without a clear monetisation strategy for its assets, investors hoping for an exit opportunity at a significant premium to book value could be in for a prolonged wait,” explains the analyst.  

“We note that the offer price is close to average post-GFC P/BV valuation of 0.74 for M&C. However, the offer price also represents a discount to the average valuation of 0.98x P/BV for M&C’s locally listed peers who are hotel operators with similar asset-heavy balance sheets and most self-owned hotels,” he adds.

Meanwhile, CIMB has kept its "add" rating on the stock with an unchanged price target of $13.15, on expectations of a potential 5% to projected RNAV for CityDev should full ownership of M&C be obtained. 

Its analyst Lock Mun Yee notes that the transaction could raise the group's gearing to 0.31 times versus 0.13 times as at 3Q17, causing post-transaction earnings and NTA to increase on a pro-forma basis by 7% and 1.5%, respectively. 

"We leave our current earnings and RNAV estimates unchanged for now, pending the successful completion of this exercise. CityDev’s share price has retraced 12% from the recent Oct high and is currently trading at close to the pre-initial announcement level. We believe the current share price has not reflected any potential accretion from this transaction,” says Lock. 

As at 12.47pm, shares in CityDev are trading 6 cents lower at $12.51.