City Developments landbank a huge liability

Its landback now stands at 5.56 million sq ft and poses lopsided risks, says OCBC.

With the domestic residential market still treading on a recovery tightrope, this is a significant negative for the property developer's investment and profitability prospects.

Here's more from OCBC:

4Q11 results within expectations. City Developments (CDL) reported 4Q11 PATMI of S$163m, down 32% YoY, mostly due to the absence of gains recognized from strata unit sales at Chinatown Point (present in year-ago quarter). As a result, FY11 PATMI cumulated to S$799m which was mostly within our expectations. FY11 topline came in at S$3,280m – again in line with our FY11 forecast (S$3,301m). Net gearing improved to 21% (versus 29% in FY10) with a healthy cash balance of S$2.6b as of FY11. Total final dividends of 13 S-cents (5 cents special, 8 cents ordinary) were proposed.

Healthy residential sales in FY11. In FY11, CDL sold a total of 1,818 units for S$1,755m versus 1,559 units for S$2,115m in FY10. Management indicated that they would launch Robertson Quay (70 units) in Mar/Apr 12 and the landed site at Serangoon Garden Way (96 units) in Apr 12. It would also continue to expand its Chinese presence by injecting S$500m into CDL China for further acquisitions, in addition to the S$300m allocated in Aug 10.

Firm numbers for the hotel segment. The hotel segment put up healthy numbers with M&C’s global RevPar up 5.8% YoY (constant currency terms), driven mainly by an increase. in average room rates. M&C’s FY11 PATMI came in at GBP161m, up 67.3%. We expect numbers from hotels to stay relatively firm, particularly in London where hospitality assets are likely to outperform with the upcoming Olympic Games.

Unfavorable risk-reward here – downgrade to SELL. While management’s execution continues to be spot on, the share price has appreciated 25% YTD and we believe the risk-reward proposition appears unfavorable currently. Our fundamental view remains unchanged that uncertainties in the domestic residential sector persist, which could bear on CDL given its significant landbank of 5.56m sq ft. Downgrade to SELL. However, we raise our fair value estimate to S$8.92 (35% discount to RNAV) from S$8.38 previously as we update our model for latest M&C valuations and FY11 financials.