CityDev - weaker hotel margins and deferrals of prime projects

1Q09 net profit of S$83.1 mn (-50% YoY, -17% QoQ) was CIT’s lowest since 2Q06. It came in at 14-18% of our and consensus’ FY09E, due mainly to lower profit margins, higher taxes and loss of S$7.2 mn mainly from share of loss of 52.5%-City e-Solutions’ education services (MindChamps, which was sold by March 2009).

Net gearing remains healthy at 0.47x. Management is encouraged by pent-up demand at the low to mid-end residential segment, as it sold 330 units at The Arte, Livia and Botannia YTD, but may defer pre-sale at prime Quayside Isle @Sentosa to completion in 2011.

FY09-11E earnings have been cut 11-23% on lower hotel earnings and slower takeup at ongoing prime projects. End-2009-RNAV was raised to S$5.53 (from S$5.18) on currency adjustments, and The Arte achieving higher-than-expected pricing and sales. With reduced risk aversion, we peg our target price to 1x RNAV (from 0.8x).

Its stock price has run ahead of the still-weak fundamantals as it almost doubled since bottom in March, implying return-to-peak residential prices and M&C doubling in value, which we believe is unlikely.

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