Subdued private homes demand pushes City Developments to diversify abroad

Newly introduced TDSR is quite deterrent.

The management of City Developments Limited expects transaction volume of local private homes to be more measured in 2H13, while prices could moderate in the mass market segment, potentially by ~5% over the next year following the Singapore government’s introduction of the Total Debt Servicing Ratio (TDSR) in June, noted Maybank Kim Eng.

This is why the company would rather err on the side of caution in tendering for land in Singapore, and will be looking at its various platforms for diversifying overseas.

Here's more from Maybank:

Results below expectations. Excluding one-off gains, CDL’s 2Q13 core PATMI of SGD73.9m (-28% QoQ; -50% YoY) was below expectations, with 1H13 core PATMI of SGD176.3m making up 28% of our full-year forecast. Management sounded greater caution, expecting stronger headwinds for the Singapore residential market in 2H13. CDL will look to other platforms for diversifying out of the Singapore residential market, but in the meantime, we feel that valuations are rich.

Reiterate SELL, TP maintained at SGD8.85. A special interim dividend of 8 cents/share has been declared. 2H13 residential profit recognition likely to be stronger. Pre-tax profit from property development declined by 32% QoQ and 44% YoY, mainly due to the timing of profit recognition. Operationally, CDL enjoyed stronger pre-sales in 1H13 at SGD2.2b from 2,114 units, up from the 1,299 units sold in 1H12 valued at SGD1.2b. CDL has lined up the mixed development at Tai Thong Crescent for launch in Sep 2013.

Future-proofing M&C amid challenging environment. CDL’s hotel operations continued to face challenging conditions, with pre-tax profits declining 22% YoY (though up 109% QoQ). Its hotels in Singapore are suffering from slowing corporate business, price pressure from new hotel supply and cost pressure from the foreign labour crunch. M&C has since set up a GBP240m refurbishment programme to rejuvenate some of its older hotels globally, which should put them in a better position to benefit when operating conditions improve.

Sounding greater caution. Following the government’s introduction of the Total Debt Servicing Ratio (TDSR) in June, management expects transaction volume of private homes to be more measured in 2H13, while prices could moderate in the mass market segment, potentially by ~5% over the next year. Meanwhile, management would rather err on the side of caution in tendering for land in Singapore, and will be looking at its various platforms for diversifying overseas.

Unattractive risk-reward. We have reduced our FY13/14 core PATMI forecasts by -10%/-8% respectively, as we adjust our profit recognition model. Given the challenges faced on various fronts despite creditable execution, we maintain our SELL recommendation and TP of SGD8.85, pegged to 30% discount to RNAV.