City Developments Ltd and Its Bonds [20 Jul 18]

Blue-chip property developer

City Developments Limited (“CDL”) was formed in 1963 as a real estate company with only eight employees. In the same year, the company was listed on the SGX (known then as the Malayan Stock Exchange). Now having a market cap of S$8.73 billion (as at 18 Jul 18), CDL is a constituent of the Straits Times Index, which tracks the top 30 companies listed on the SGX.

In 1969, the Malaysian conglomerate Hong Leong Group invested CDL and placed three representatives on the board of directors. Mr Kwek Leng Beng was among one of them, and remained as chairman and executive director today. Mr Kwek leads CDL’s management team together with his son, Sherman Kwek (group CEO). The Kwek family is the controlling shareholder of CDL through their ownership of Hong Leong Group, which in turn holds a stake of 48.4% in CDL.

From its humble beginnings, CDL has grown into a property giant having built over 40,000 homes, and owns more than 18m square feet (“sq ft”) of floor area of office, hotel, retail, residential, and industrial space globally.

CDL is a sprawling entity comprising of over 500 subsidiaries and associated companies, operating across 100 locations in 28 countries. The firm owns a number of listed companies, tabulated in Table 1.

Table 1: CDL’s publicly-listed affiliated companies

CDL’s business spans across four segments namely property development, hotel operations, rental properties, and “others”. The last segment comprises of operations in building maintenance, project management, club operations and laundry services. As depicted in Chart 1, the group derives its revenue mostly from the property development and hotel operations segments.

Chart 1: CDL’s revenue breakdown by business segments (1Q18)

Strong 1Q18 revenue due to Criterion EC revenue recognition

CDL’s revenue jumped 35% YoY to S$1.06 billion in 1Q18 (1Q17: S$783.6m). The strong performance was largely driven by its property development segment, which contributed S$563m of revenue in 1Q18 (1Q17: S$299m). The completion of The Criterion executive condominium (“EC”), which achieved TOP in February, gave a huge boost to segment revenue. Besides that, strong sales at newly launched New Futura (Phase 1 was 97% sold as at May) also contributed to performance.

The hotel operations segment, which consists primarily of CDL’s subsidiary Millennium & Copthorne Hotels plc, recorded a 3% YoY increase in revenue to S$377.8m in 1Q18 (1Q17: S$366.5m). Segment pre-tax profit jumped to S$20.8m in 1Q18 (1Q17: S$5.1m) on the higher revenue and better performance from JW Marriott Hotel Singapore South Beach. The stronger GBP (against SGD) in 1Q18 also contributed to performance, as most of the hotel operations are run in the UK.

Overall, CDL’s profit before tax (“PBT”) climbed 22% YoY to S$133.9m in 1Q18 (1Q17: S$109.7m). But while the property development segment was the biggest contributor (48%), PBT from property development actually fell 12% YoY to S$80.8m (1Q18: S$92.0m) due to lower margins for The Criterion EC. The decline was outweighed by higher profits at hotel operations and rental properties, which recorded a gain of S$29m from the divestment of Mercure Brisbane and Ibis Brisbane in January (by subsidiary CDL Hospitality Trusts).

Credit outlook remains robust despite cooling measures

CDL had been among the best positioned property developers to profit from the rising home prices in Singapore, with its vast land bank of ~2.4m sq ft of gross floor area in the city-state (see Chart 2). Then the Singapore government had a sudden policy change early this month when it announced cooling measures by raising Additional Buyer’s Stamp Duty rates and tightened loan-to-value limits.

Chart 2: CDL’s land bank as at 31 Mar 18

Previously lauded for its aggressive land banking in Singapore and strong domestic pipeline of more than 3,000 residential units, CDL is now vulnerable to the negative impact of the property cooling measures. Dampened market sentiment might hit the firm’s contracted sales growth and pricing power. Its residential sales value had soared 66% YoY in 1Q18 and 55% in FY17.

Based on past observations, the residential market will be rocked in the initial few months following implementation of the cooling measures. According to a report published this month by Colliers International, new home sales fell by 65% and 73% respectively in the following month after the last two rounds of cooling measures were announced (in January and June 2013). The longer-term effects were gradual but steady, as home prices fell for 15 consecutive quarters between 4Q13 and 2Q17 (see Chart 3).

Chart 3: URA Private Residential Property Index

Nonetheless, we think the cooling measures should have minimal negative impact on CDL’s credit profile. The company’s healthy balance sheet gives it the financial power to hold on to its Singapore pipeline and delay launches, if needed. With net gearing near a record low, CDL has plenty of manoeuvring room, e.g. to invest in overseas projects.

In addition, CDL have actually turned in a decent performance during the 2013-2017 market downturn. As shown in Chart 4, the company’s revenue was on an uptrend and its PBT was steady during FY13-17. Although sales and earnings growth were underwhelming, CDL’s financial health stayed robust, supported by its diversified revenue sources and large operating scale.

Chart 4: CDL’s revenue and profit before tax from FY13 to FY17

Overseas business

Whilst local development projects remain core to CDL’s business and should continue to anchor results moving forward, the firm actually has significant overseas presence. We estimate that overseas revenue made up 45% on average of its revenue during FY13 to FY17.

CDL also has a long list of overseas project pipeline (see Table 2). These overseas developments provide some diversification benefits, and should soften the blow from Singapore’s property cooling measures.

Table 2: Summary of CDL’s overseas projects

Just last week, CDL announced that it will invest HKD237.81m (~S$41.4m) in E-House’s initial public offering on Hong Kong Stock Exchange. E-House is the largest real estate agency service provider in the primary market in China, with operations spanning 186 cities across 30 provinces in the country. The investment in one of China’s top sales agency should benefit CDL’s residential projects in the country.

Healthy credit profile

CDL’s borrowings fell to S$4.84 billion from S$5.04 billion in the three months ended March. Net gearing (net debt/equity), which increased marginally to 12% (4Q17: 11%), remains very healthy and provides plenty of headroom for more land acquisitions.

CDL enjoys a strong liquidity position with its cash balance of S$3.41 billion. Short-term borrowings stood at just ~S$1 billion at the end of March, including the S$50m CITSP 2.780% 21Sep2018 Corp (SGD) and S$100m CITSP 3.380% 20Mar2019 Corp (SGD).

Interest coverage remained robust at 7.96x in 1Q18 (1Q17: 7.87x). Looking forward, with the cooling measures likely to weigh on home-price growth and margins, CDL’s coverage ratios and other credit ratios that measure its debt burden relative to earnings (e.g. debt/EBITDA) may weaken. CDL has 261 unsold units from launched projects and 3,000 units lined up to be launched in the local market by 2019.

CDL's bonds offer good value for money

Within the CITSP curve, we prefer the CITSP 3.480% 03Apr2023 Corp (SGD), which is paying a generous 3.1% YTM against CDL’s healthy credit metrics. Indicating a spread of 93bps above SGD Swaps, the CITSP 3.480% 03Apr2023 Corp (SGD) offers better value compared to the other longer tenor CITSP bonds (see chart 5 and table 3).

Chart 5: CDL's outstanding bonds

The CITSP 3.48% ’23s also compare favourably to the bonds of CDL’s property peers. As a reference, CapitaLand Ltd’s (net gearing: 49%) CAPLSP 3.800% 28Aug2024 Corp (SGD), offers a YTM of 3.25% (Z-spread: 100bps) against a 1.4-year longer tenor. For investors who prefer another maturity off the CITSP curve, we like the CITSP 3.000% 02Apr2020 Corp (SGD) (YTM: 2.535%) and CITSP 3.900% 21Mar2024 Corp (SGD) (YTM: 3.232%) too.

Table 3: Relative Valuation

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.