City Developments: Weak results within expectations

Weak results within expectation. City Developments (CDL) reported a weak set of 1Q09 results that was largely within expectation. Revenue declined by 18% YoY and 13.2% QoQ to S$622.5m due to weaker revenue contribution from its property development and hotel operations. Notwithstanding the weak office market, its investment properties continued to turn in strong performances, as positive rental reversions drove revenue higher by 22.4% YoY and 6.4% QoQ to S$70m in 1Q09. Operating profit declined by 39.7% YoY and 20.7% QoQ due to weaker margins from hotel operations but was partially offset by lower salaries and rental paid to CDL Hospitality Trusts. Contribution from jointly-controlled entities fell sharply by 69.3% YoY to S$17.6m due to the completion of projects (St Regis Residences and The Sail). PATMI for 1Q09 declined by 49.6% YoY and 16.8% QoQ to S$83.1m.

Shifting focus to the mass market segment. CDL had been a beneficiary of the return in demand for mass and mid-market properties over the past months, selling more than 60 units in Livia and more than 250 units in its new launch, The Arte at Thomson. We believe that the current condition in the property market had prompted CDL to shift its focus towards the mass market segment. CDL is now planning to launch a new mass market project at the former Hong Leong Garden Condominium at West Coast Drive by 4Q09. At the same time, CDL could also be holding back the launch for its high end project- The Quayside Isle Collection at Sentosa Cove until the project is completed or near completion. Such moves demonstrate CDL's competitive advantage of holding a diversified range of landbank that provides flexibility to manage the challenging market condition.

Maintain SELL. We are now raising our FY09 revenue and PATMI estimates to S$2,667.9m (previously S$2,538.7m) and S$451.9m (previously S$444.5m) to factor in recent sales at Livia and The Arte. Our RNAV estimate has now been raised to S$7.72 per share (previously S$7.56). While sentiments in the equity market had improved considerably since March, we prefer to remain cautious at this point in time and maintain our 30% discount to development profits and valuation of investment properties. Key parameters to re-rating would include the sustainability of recent home buyers' demand and improvement in unemployment rate and wages. Our fair value of CDL has now been raised to S$5.69 (previously S$5.53) but we maintain our SELL recommendation on valuation grounds.

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