CDL can take flight again after shaking off albatross

The Covid-19 pandemic almost decimated City Development’s vast global hospitality business while its property development side suffered. PHOTO: CITY DEVELOPMENTS LTD

SINGAPORE – Nineteenth-century German philosopher Friedrich Nietzsche once wrote an aphorism which went, “what doesn’t kill you makes you stronger”.

The phrase may be particularly appropriate for listed property group City Developments (CDL), which has gone through its own annus horribilis over the past year.

The Covid-19 pandemic almost decimated its vast global hospitality business while its property development side suffered as the market dived. Meanwhile, its multi-billion-dollar investment in Chinese property group Sincere Property went sour, sparking not just losses, but reportedly, also tensions within the Kwek family.

Thus, there is little wonder that CDL’s stock – rated as one of the best institutional property plays in the Singapore market – went skidding. Yesterday, it closed at $7.98, a far cry from its $13.50 level three years ago. Even early last year, as the pandemic closed in, it was trading at about $11.

The company has now taken a one-off write-down of around $1.78 billion on its Sincere Property investment in China, $99 million impairment losses for its hotels and investment properties and $35 million allowance for foreseeable losses for development projects.

Excluding these write-downs, the group would have recorded a pre-tax profit of $120.8 million for the 2020 financial year. CDL instead reported a net loss of $1.9 billion.

All that is recent history.

Having written off 90 per cent of its Sincere investment, CDL has shed this albatross from around its neck and is now in a position to look ahead to grow and unlock shareholder value in its two key portfolios – hotels and property development.

Hotels

The group has 152 hotels, valued at $5.88 billion last year, in 30 countries.

In late 2019, it privatised its London-listed Millennium & Copthorne (M&C) hotel group at a valuation of £2.23 billion (S$4.13 billion).

M&C has 145 hotels in 29 countries across Europe, Australasia and Asia. It disposed of three hotel assets last year, and will record divestment gains of $49.9 million from the sale this year. There are plans to divest up to two assets in each region over the next few years.

CDL also holds 38 per cent of Singapore-listed CDL Hospitality Trusts, which has a market capitalisation of $1.6 billion.

Its Singapore portfolio includes nine hotels: St Regis, W Hotel, JW Marriott, Orchard, Grand Copthorne, M Hotel, Studio M, M Social and Copthorne King’s.

Despite global occupancy levels plunging to below 40 per cent and suffering losses of $573 million last year amid the pandemic, CDL’s hotel asset is a potential goldmine.

Here’s why.

The value of all these hotels is held at cost, less annual depreciation and impairments. Last year, it wrote down these assets to the tune of $99.5 million. In fact, CDL writes down its hotels by about $20 million every year.

But there is deep value in this portfolio, given the huge potential to restructure and unlock shareholder value in the post-Covid-19 era.

As property specialist JLL noted in its latest report, shifting demand dynamics create an urgency for hotel operators to redefine today’s lodging experience.

OCBC Investment Research reckons there is a lot of opportunity for CDL to unlock value by restructuring its M&C hotel portfolio, spinning off some of its British commercial properties into new Reits and redeveloping some of its older Singapore commercial properties.

The company has to ask itself how many hotels it will need in the post-Covid-19 era. Can some be sold? Can others be redeveloped? Can the rest be “reimagined” for a new era of hospitality demand, to provide higher return on investment? These are issues management has to explore as the world breaks free of the pandemic and global travel returns.

Development properties

Arguably, CDL has some of the most valuable real estate for redevelopment.

This includes the freehold Fuji Xerox Towers in Anson Road, Central Mall in Havelock Road, and City House in Robinson Road.

Meanwhile, the company’s residential launch pipeline this year totals more than 1,200 units, including the former Liang Court site, a joint-venture project with CapitaLand.

Its Irwell Hill Residences in District 9 will launch on April 10. The 540-unit, 99-year leasehold project will be CDL’s first launch this year.

It is looking at clinching Master Developer status for major projects like the 8.3ha Kampong Bugis site. The area has been earmarked for future private residential use and can yield up to 4,000 new homes.

CDL’s residential land bank stands at around 445,000 sq ft. Then there is the potentially huge commercial land bank. Land is a scarce raw material in Singapore, and CDL’s existing portfolio could yield billions of dollars of earnings straight to its bottom line over the next decade. This is why many institutional investors rate it as Singapore’s top property stock.

Conclusion

Yes, CDL has gone through a tough year. The optics and publicity have been bad.

But if one were to scrutinise the company’s portfolio, the potential to unlock shareholder value is tremendous. With most of its Sincere investment written off, management can now focus on growing its core business.

This is similar to what previously-listed Osim went through with its United States-based Brookstone investment a decade or so ago. Osim’s stock started taking off not long after a painful Brookstone write-off.

But CDL has to value its assets realistically. The net asset value (NAV) per share following the recent write-downs fell to $9.38 as at Dec 31 last year.

But this NAV appears to be hugely understated given that CDL cites the value of investment properties at cost, after discounting accumulated depreciation and impairment losses.

Factoring in fair value gains on investment properties, the revalued NAV (or RNAV) per share would be at least $14.26. Even if one were to give a 20 per cent discount to NAV – as is the case for many property stocks – CDL should not trade at below $11.

Even this assumes the group’s hotels are stated at cost. If the revaluation surpluses of these assets are included, based on its own 2020 internal estimates and external valuations, CDL’s RNAV per share would have further increased to $16.88.

This means CDL’s stock is now trading at a discount of over 45 per cent to RNAV.

While conservatism has its merits, NAVs have to be relatable to return on assets and return on equity. At the moment, CDL is too deeply undervalued relative to both metrics, and industry peers.

The crisis of the past year has not killed CDL. The market is forward-looking. It is now time to get stronger. And time to regain its mojo.

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