City Developments - Beware when government steps in

Friday, September 18, 2009

We have downgraded our rating for City Developments (CDL) to 4 (Underperform) from 3 (Hold) after the government announced, on 14 September, measures to ensure a ‘stable and sustainable’ property market, including a surprise (in our view) withdrawal of the interest absorption scheme (IAS).

We expect the shares of CDL, one of the biggest developers with a significant portion of its earnings and NAV exposed to the Singapore residential market, to be adversely affected.

We believe the environment is not conducive to owning property-developer shares, with the government set on pumping more land available for development from 1H10 and unlikely to reinstate, if ever again, the IAS until at least the next propertymarket bottom.

We have raised our six-month target price, based on a sum-ofthe- parts (SOTP) valuation, to S$9.52 from S$9.26 due to the increase in market value of its listed hotel operations. We have not changed our earnings forecasts because we do not expect CDL’s immediate pipeline of project launches to be hit badly.

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