City Developments diversification strategy won't plug Singapore market decline

At least in the short term horizon.

City Developments may have stepped up its overseas expansion and investments but this diversification strategy won't be enough to make up for its earnings hit from the Singapore market, argues Barclays.

Here's more:

The Singapore property market remains challenging, in our view, and CDL is now focusing on new markets and products. It has stepped up its overseas expansion and invested cS$700mn (4% of assets) in the UK and Japan recently.

We expect this diversification overseas to bolster the company's growth prospects in the medium term, but believe it is unlikely to plug the decline in its core Singapore market in the near term. We lower our 2014-15E EPS estimates on the weaker home sales and hotel profit outlook for the Singapore market, and roll over to an end-2015E RNAV of S$12.84, with a revised price target of S$8.99 (from S$9.08).

We maintain our Underweight rating on headwinds in CDL's core markets, with 69% of its Singapore landbank exposed to the high-end market, on which we remain negative.

Diversifying into China, UK, Japan and, potentially, Australia. Besides its three ongoing projects in China acquired since 2010, CDL recently acquired six freehold properties in the Greater London area for £157mn (S$326mn), and has also tied up with a US-based investment firm to acquire a prime freehold site in Tokyo for Yen30.5bn (S$355.5mn). CDL also mentioned in its 2013 results that one of the more mature markets it plans to seek opportunities in is Australia.

Singapore home sales, hotel profits likely to stay weak: CDLHT's Singapore hotel average daily rates dipped 4.1% y/y in 3Q14 to S$209, due mainly to new supply, weaker visitor arrival figures, as well as a cautious corporate spending environment. Overall developer home sales are down 52% YTD, with prices down 3.9% from the peak in 3Q13. Several CDL projects, such as Commonwealth Towers, The Venue Residences, and its high-end properties, have not performed well since 2013 and we do not expect this to change in the near term. We expect CDL's skinny launch pipeline in the next 12 months to translate into lower profit recognition.

Lower EPS and PT, maintain UW: We lower our 2014E and 2015E EPS by 2% and 8%, respectively, to reflect weaker Singapore presales and hotel earnings. We also roll over our RNAV to end-2015E, and trim our RNAV estimate to S$12.84 from S$12.97. We thus lower our price target to S$8.99, still based on -1sd of 30% discount to RNAV. We believe CDL remains the largest listed developer proxy to the Singapore residential market (41% of its RNAV), with 69% of its properties in the high end of the market.