Millennium & Copthorne privatisation unlocks value for City Developments, say analysts

Millennium & Copthorne privatisation unlocks value for City Developments, say analysts

Michelle Zhu
10/10/17, 03:06 pm

SINGAPORE (Oct 10): Brokers are unanimously positive on City Developments' potential offer for Millennium & Copthorne Hotels, given that the acquisition will be value accretive to the group.

On Monday, the developer announced it is offering 552.5 pence each for the remaining shares in M&C it does not own, in a deal which values the hotel group at £1.8 billion ($3.2 billion).

See: City Developments to take Millennium & Copthorne private, values hotel group at $3.2 bil

In a Tuesday report, Maybank Kim Eng analyst Derrick Heng observes that the offer price of 552.5 pence is at a 21.4% premium over its latest closing of 455 pence. The offer price also translates to 0.67 times its latest book value, which is close to its 10-year average price-to-book value (P/BV) of 0.72 times, he says.

The research house is maintaining its “buy” call on CDL with an unchanged price target of $13.60.

Heng says a potential buyout of all minority shareholders in M&C would cost CDL about $1.1 billion, which the developer has the balance sheet capacity to fund given its $3.3 billion of cash and a net gearing of 0.18 times.

“While CDL announced its intention to maintain M&C’s current business model, we believe it could potentially unlock value in the asset-rich company in the medium term. For example, M&C unlocked the redevelopment potential in the former Copthorne Orchid Hotel Singapore when it was redeveloped into a 150-unit condominium, The Glyndebourne, in 2013,” he adds.  

Meanwhile, Lim & Tan Securities’ research team is also keeping its long-held “buy” recommendation on CDL, noting that its offer price is at a 33-34% discount to M&C’s last reported net asset value (NAV) of 821.5 pence.

The team believes that by increasing its stake in M&C to 100%, CDL's recurring stream of income would balance its “more lumpy development profits”.

Lim & Tan estimates that the group’s gearing will only rise to 25-28% from 19% given its strong cash position. This means CDL will be able to take on more development projects even after the acquisition.

Likewise, OCBC Research’s Eli Lee – who is reiterating his “buy” call on the stock with an unchanged fair value of $12.90 – sees the acquisition as a positive development for CDL on what he deems is an attractive offer.

In Lee's view, a full consolidation of M&C on the deal’s terms will be accretive for CDL. But he highlights that there is no certainty a formal will offer will be made, and that talks on the other terms and conditions of the offer are still ongoing.

As at Monday, CDL indirectly owns 65.2% of the shares of M&C. The proposed cash consideration comprise of a cash amount of 545 pence per M&C share and a special dividend of 7.5 pence per share which will be payable upon the offer becoming unconditional.

"This represents a 22% premium to the volume weighted average price (VWAP) of 452.7 pence per share over the period of one month before Oct 6,” notes Lee. 

DBS Research has similarly maintained its "buy" rating on the stock with a price target of $12.63 based on a parity to revalued net asset value (RNAV), which implies 1.2 times price to net asset value (P/NAV).

In a Tuesday report, analysts Rachel Tan and Derek Tan say CDL could unlock $2.03 per share in value in the medium-term on the back of potential synergies and repositioning of its hotels, should the group be successful in gaining full control of M&C.

They add that the deal could also serve as a ready pipeline of assets for potential injection into CDL Hospitality Trusts, which is managed by M&C REIT Management, an indirectly wholly-owned subsidiary of M&C.  

“While CDL is largely the preferred stock of those who have gradually turned positive on the Singapore market, we believe that further upside surprises will come on the back of better than projected sell-through rates at remaining unsold / unlaunched inventories in Singapore; further new landbanking opportunities; and stronger than projected sales at its International portfolio, mainly in the UK,” say the analysts. 

As at 3.01pm, shares in CDL are trading 7 cents higher at $11.82. 

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