The group may face the dilemma of whether to use divestment proceeds to repurchase its depressed shares or acquire exciting new assets

 

WHEN City Developments Limited (CDL) tumbled below S$6.00 last month, I thought it might be time to buy the stock.

 

The company&rsquo s board and management evidently felt the same way. On Mar 8, CDL said it had initiated a share buyback programme.

 

&ldquo Global equities have been hit by macroeconomic headwinds, resulting in depressed valuations. Our share buyback programme demonstrates our confidence in CDL&rsquo s strong fundamentals and growth potential,&rdquo said the company&rsquo s chief executive Sherman Kwek.

 

Since Mar 8, CDL has spent nearly S$30.4 million repurchasing more than 5.1 million shares in the market. This translates to an average price of S$5.92 per share.

 

The share buybacks accounted for just over 22 per cent of CDL&rsquo s total traded volume.

 

The company closed last week at S$5.91, up 4.1 per cent since the share buyback programme started. The benchmark Straits Times Index was up 1.3 per cent during the same period.

 

Ironically, CDL&rsquo s share buyback programme has put me off the idea of buying the stock. For one thing, I am not keen on competing with CDL for its own shares.

 

It is also not clear to me that CDL should be returning more cash to its shareholders at this point. With interest rates elevated, financing costs have risen significantly for property developers and real estate investment trusts.

 

CDL ended last year with net gearing of 103 per cent, up from 84 per cent at end-2022.

 

Moreover, a key reason CDL&rsquo s shares have been trading at depressed valuations is that the group&rsquo s core profitability has waned over the years &ndash much like most other property development groups.

 

This column has previously pointed out that CDL&rsquo s return on equity (ROE) sank into low single digits during the decade leading up to the pandemic. Last year, CDL delivered an ROE of only 3.5 per cent &ndash despite the group&rsquo s solid operational performance.

 

For 2023, CDL reported a 50 per cent rise in revenue to S$4.94 billion &ndash driven by its core property development business, which more than doubled its revenue to S$2.79 billion.

 

The group&rsquo s net earnings declined 75.3 per cent to S$317.3 million, due in large part to substantial divestment gains chalked up in 2022. Excluding all divestment gains and impairment losses, CDL would have achieved a 301.3 per cent increase in net earnings to S$188.6 million.

 

Some analysts said CDL&rsquo s core financial performance for 2023 did not meet their expectations due to weak margins and high borrowing costs.

 

Without a sustained improvement in CDL&rsquo s underlying profitability, a share buyback programme may do little more than provide a temporary boost to the market value of its shares.

 

Creating shareholder value

To be clear, I am not suggesting that CDL&rsquo s shares are not attractively priced or, that CDL should not repurchase its shares as part of a broader strategy to unlock value.

 

One of the biggest problems with share buybacks is that companies often launch these exercises without their boards and management clearly communicating what they believe their shares to be worth.

 

The result is investors not having a clear sense of whether a share buyback programme is really creating value.

 

This is not the case with CDL. By the company&rsquo s own estimation, its revalued net asset value (RNAV) at the end of 2023 was S$19.46 per share.

 

&ldquo Our shares are trading at a 70 per cent discount to our RNAV, and by acquiring our shares at value-accretive prices, it presents an attractive opportunity to deploy our capital into our portfolio which we know best,&rdquo said Kwek, when CDL unveiled its share buyback programme on Mar 8.

 

&ldquo This move signals our commitment to strengthen our alignment with our shareholders,&rdquo he added.

 

CDL&rsquo s existing share purchase mandate allows it to buy 10 per cent of its outstanding shares &ndash which translates to more than 90 million shares. Based on CDL&rsquo s last closing price, the total value of the current share buyback programme could be more than S$500 million.

 

Kwek said during CDL&rsquo s 2023 results briefing last month that he is targeting divestments of S$1 billion this year.

 

By monetising assets and using a portion of the proceeds to buy back shares at a deep discount to RNAV, CDL could create significant value for its remaining shareholders.

 

Buybacks versus growth

The big question is how far CDL can take such a value-unlocking manoeuvre.

 

This is arguably not the best of times for CDL to be monetising its best assets, given that currently elevated interest rates may deter many potential buyers.

 

Even if CDL succeeds in divesting some assets at decent prices, the group would face the dilemma of whether to use the proceeds to repurchase its shares to narrow the discount at which they are trading to RNAV, or to acquire new assets that may drive its RNAV higher over time.

 

CDL certainly does not appear to be having any difficulty finding interesting assets. Last year, it spent some S$2.4 billion on acquisitions and investments in Singapore, Australia, Japan, China, South Korea and the United Kingdom.

 

Among the more significant deals was the purchase of St Katharine Docks in London for £ 395 million (or about S$636 million). The 23-acre freehold mixed-use estate fronting the Thames comprises more than 500,000 square feet of offices, residences, restaurants and shops. It also includes a marina with berths for up to 185 yachts.

 

CDL also acquired 25 freehold residential assets in Japan for 35 billion yen (or about S$321.9 million) last year. These properties comprise a total of 836 units, including four retail units.

 

Closer to home, CDL won a residential development site in Woodlands for S$294.9 million. It was also part of a consortium that won a separate residential site in Toa Payoh for S$968 million.

 

Earlier this month, CDL was reported to be close to sealing a deal to buy the Hilton Paris Opera hotel from Blackstone for 244 million euros (or some S$356 million). The property is located next to the Paris Saint-Lazare train station, and a 15-minute walk from the Eiffel Tower.

 

In a market where many companies have been taken private for less than their book values, CDL&rsquo s share buyback programme is a rare expression of fidelity to minority investors.

 

To provide a lasting boost to the market valuation of its shares, the company should perhaps offer more information on how the buyback programme will be managed alongside its plans to expand its portfolio of assets and take on more development projects.

 

City Developments has stepped up its share buybacks, spending nearly $13 million over the past week.

 

On March 12, the property giant paid $5.98 each for 948,000 shares.

 

This follows a buyback of 304,400 shares for $5.84 on March 11.

 

The current round of share buybacks, following a 5-year hiatus, commenced on March 8 when it paid $5.75 each for 954,000 shares.

 

In a news release then, CDL said its shares are currently trading significantly below their intrinsic value despite the company&rsquo s &ldquo strong fundamentals&rdquo .

 

As at Dec 31 2023, CDL' s NAV per share was $10.12 and its revalued NAV was $19.461 per share.

 

City Developments' share buyback sends positive signals, discourages short-selling, analysts say

 

Analysts from Citi Research and JP Morgan like that City Developments C09 0.17% has reignited its share buyback programme after a five-year hiatus.

 

On March 11, CDL announced it had bought back 304,400 for an average price of $5.84 per share while on March 8, the company bought back 954,000 shares at an average price of $5.75 per share.

 

&ldquo The continued buyback reiterates management&rsquo s confidence in its business and outlook as well as the significant value on offer with CDL' s share price at a deep discount to the NAV per share of $10.12 and CDL&rsquo s estimated RNAV of $19.46,&rdquo JP Morgan says.

 

Citi Research says the share buyback sends five important messages.

 

First, it gives a clear signal that management views the current share price as undemanding.

 

Second, it shows management&rsquo s confidence in the company&rsquo s own fundamentals and growth potential.

 

Third, the buyback signals CDL&rsquo s commitment to strengthen its alignment with shareholders.

 

Fourth, at $5.75 and $5.85, the buyback represents potential NAV and EPS accretion.

 

Finally, the willingness to buy back its shares could mitigate the potential impact from short sellers.

 

SHARES of City Developments : C09 +3.13% (CDL) rose steadily on Monday (Mar 11) after the property developer announced it had initiated share buybacks for its ordinary shares on the open market.

 

As at 1.40 pm after the midday trading break, the counter gained as much as S$0.21 or 3.7 per cent to S$5.96 after 2.3 million of its securities changed hands.

 

It later eased to S$5.92 as at 2.14 pm, up S$0.17 or 3 per cent. CDL was the fifth most actively traded in terms of value with 2.6 million shares worth S$15.1 million transacted at the time.

 

No married deals took place in early trade, according to ShareInvestor data.

 

Last Friday, CDL cited its discounted share value as the reason for its share buybacks.

 

The property developer bought back 954,000 ordinary shares, or 0.11 per cent of its issued share capital, at an average price of S$5.75 a share for a total consideration of S$5.5 million.

 

The lowest price that CDL paid on the market was S$5.69, while the most that it forked out was S$5.78.

 

=Analysts like LHN for its growth drivers ahead

 

LHN Limited recently announced its 1QFY2024 ended December 2024 update, which saw a portfolio occupancy of over 90% for its assets (industrial, commercial and co-living). The two major projects, 55 Tuas South and GSM Building, are also proceeding as scheduled.

 

During the first quarter, the group successfully secured the master lease renewal for an industrial property at 34 Boon Leat Terrace. Coliwoo also launched its 15th co-living property, the Coliwoo Hotel Pasir Panjang, a four-storey establishment at 404 Pasir Panjang Road. It also managed a total of 2,153 keys across its Singapore&rsquo s Coliwoo co-living projects and overseas 85 SOHO projects.

 

On Jan 25, LHN secured two sites by the Ministry of Health (MOH) to provide accommodation for 700 public sector healthcare professionals (mainly nurses and allied health professionals). Operations will commence in 2H2024.

 

PhillipCapital, which has kept its &ldquo buy&rdquo call and 39 cents target price, believes that LHN&rsquo s advantage in securing this project is its operational experience in the co-living sector.

 

&ldquo Earnings visibility has improved as planned projects are underway and occupancy rates remain vibrant. We view the healthcare accommodation project as a new growth driver. Margins are unclear, but the project is capital light as the authorities provide the premises. Eleven more potential sites may be tendered out,&rdquo says analyst Paul Chew.

 

Maybank Securities has similar views, as it also kept its &ldquo buy&rdquo call and 45 cents target price.

 

Analysts Li Jialin and Eric Ong say: &ldquo Overall, we note that operational performance remains positive on the back of a buoyant Singapore hospitality market. We expect momentum to pick up with more Coliwoo openings in 2H2024.&rdquo

 

The analysts note that the group&rsquo s total number of keys grew by 89 to 2,153 in 1QFY2024, while the two MOH contract wins in January will add at least 350 rooms to its portfolio.

 

In its overseas operations, LHN intends to rebrand its existing 85 SOHO assets in Cambodia/China to Coliwoo brand, while looking to expand to Jakarta, Indonesia. Management is confident of meeting its 800-key target per year.

 

&ldquo We also see incremental increase from the carpark service segment, with two projects (over 800 lots) added to its Hong Kong business. Additionally, LHN secured 24 new facility management contracts,&rdquo say Li and Ong.

 

Management also sees stable performance for the industrial and commercial segments. Building on its renewable energy portfolio, its energy subsidiary recently won seven new solar energy contracts with 1.7-megawatt combined capacity.

 

LHN is on track to open its three Coliwoo assets located at Arab St, River Valley, and Rangoon Rd in 2H2024.

 

&ldquo With GSM&rsquo s order for the sale obtained from the High Court, we expect LHN to complete the acquisition in May,&rdquo say the analysts, expecting the six-month renovation process to start end-FY2024.

 

Management is also on the lookout for new projects to expand its portfolio. Li and Ong expect more capital capital recycling into FY2025. Potential sale of assets is likely to emerge from the industrial segment (food processing factory 55 Tuas South and B1 light industrial Four Star Building).

 

CITY : C09 +1.23% Developments Ltd (CDL) : C09 +1.23% initiated share buybacks for its ordinary shares on the open market on Friday (Mar 8), citing its discounted share value as a reason.

 

The property developer picked up 954,000 ordinary shares, or 0.11 per cent of its issued share capital, at an average price of S$5.75 a share for a total consideration of S$5.5 million.

 

The lowest price that CDL paid on the market was S$5.69, while the most that it forked out was S$5.78.

 

The average share price marked a discount of 43 per cent to the net asset value (NAV) of S$10.12 a share, and a discount of 70 per cent to revalued NAV per share of S$19.461 as at Dec 31, 2023, CDL noted in an after-market announcement on SGX.

 

Its announcement comes a week after it posted its financial results.

 

While CDL achieved a record revenue of S$4.9 billion for the year ended Dec 31, 2023, its net profit dropped 75 per cent to S$317.3 million, as higher financing costs ate into profits in the absence of divestment gains.

 

In a press release on Friday, CDL said that its shares were &ldquo currently trading significantly below their intrinsic value&rdquo despite the company&rsquo s strong fundamentals.

 

Sherman Kwek, CDL&rsquo s group chief executive officer, said that global equities have been hit by macroeconomic headwinds, resulting in depressed valuations.

 

&ldquo Our share buyback programme demonstrates our confidence in CDL&rsquo s strong fundamentals and growth potential,&rdquo he noted.

 

He added that the discounted shares present an &ldquo attractive opportunity&rdquo to deploy CDL&rsquo s capital in its portfolio. It also signalled the company&rsquo s commitment to strengthen its alignment with shareholders.

 

The developer added that the buyback was in line with a share purchase mandate that was renewed at the annual general meeting on Apr 26, 2023, with the company authorised to buy back up to 10 per cent of the total number of issued ordinary shares and preference shares. This translates to 90.7 million ordinary shares and 33.1 million preference shares.

 

It added that the share buyback programme will be made in tranches over a period of time, subject to market conditions and depending on the prices at which the ordinary shares are purchased. The purchased ordinary shares will be held as treasury shares, and a portion of them may be deployed for the company&rsquo s long-term incentive plans.

 

The latest buyback programme follows CDL&rsquo s off-market equal access offer last November to buy back up to 10 per cent of the total preference shares issued, at the offer price of S$0.78 per share.

 

The offer was completed in December 2023, with the group&rsquo s purchase of 33.1 million preference shares. The purchased preference shares have been cancelled, reducing the group&rsquo s finance cost in relation to the coupon payment obligation for these preference shares, said CDL.

 

The company has been mulling share buybacks for some time. At its results briefing in 2022, Kwek said that the group was &ldquo actively discussing&rdquo share buybacks as it believed its assets and share price was undervalued.

 

Following the results of the developers for FY2023 for the year to Dec 31, 2023, JP Morgan has said that City Developments&rsquo net profit was some $30 million below its forecast because of higher interest cost.

 

CDL&rsquo s FY2023 profit before tax rose by 90% y-o-y $353 million because of lumpy earnings on the back of the completion of executive condominium Piermont Grand in 1H2023 and profit from the sale of the Shirokane site in Tokyo.

 

CDL acquired Shirokane in September 2014 for JPY30.5 billion or the equivalent of $355.5 million at the time, and divested the site for JPY50 billion ($450 million) in 3Q2023.

 

On Feb 28, CDL&rsquo s management announced a $1 billion divestment target for this year, in the hope of narrowing the discount between its share price and NAV of $10.12.

 

CDL also provides an RNAV, which was $17.21 as at Dec 31, 2023.

 

Since then, Mingtiandi has reported that CDL is acquiring the Hilton Paris Opé ra in France from a Blackstone fund in a deal which values the asset at EUR244 million ($356 million). CDL acquired St Katharine Docks in 2023 for the equivalent of $636 million (GBP395 million).

 

This year&rsquo s $1 billion divestment target may include rental housing, student accommodation, residential land bank and non-core hotels. CDL has yet to build out a fund management arm that provides it with a steady stream of fee income to offset its lumpy development income and profit, in particular from executive condominiums.  

 

Since a public REIT is unlikely at this juncture, CDL could initiate a private REIT. On Feb 19, CDL subsidiaries City Atlasgate UK and City Pinnacle UK applied for their respective shares to be admitted to The International Stock Exchange Authority (TISE listing).

 

Following the TISE Listing, the companies became UK REITs, which are more tax-efficient structures. For instance, Elite Commercial REIT MXNU 0.00% has done this but it has not affected the units in issue on the Singapore Exchange S68 -0.32% .

City Atlasgate owns UK purpose-built student accommodation while City Pinnacle owns UK commercial assets. These may include CDL&rsquo s office properties such as 125 Broad Street and Aldgate House. CDL could inject these assets into a private REIT rather than a public REIT where it may be able to get capital partners.

 

&ldquo CDL is open to entering into strategic partnerships to establish funds seeded with some of CDL&rsquo s assets,&rdquo JP Morgan says.  

 

In this event, it need not sell down its entire stake but hold on to around 20% in the manner of CapitaLand Investment 9CI -0.37% , as an example.

 

&ldquo Proceeds from asset sales will be used to reduce debt, distributed via special dividends and potentially a share buyback,&rdquo JP Morgan says, adding that CDL&rsquo s share price is down to levels where it may activate a share buyback.

 

UOL Group&rsquo s financials appear more robust than CDL&rsquo s in terms of gearing, and operating and free cash flow. Even then, according to JP Morgan, its core Patmi in FY2023 fell by 19.8% y-o-y to $277.2 million, which was below expectations of 80% of JP Morgan&rsquo s expectations, and 87% of consensus estimates.

 

Weaker development income in Singapore and overseas coupled with higher administrative expenses, up 31% y-o-y, were the culprits according to the JP Morgan report.

 

For FY2023, JP Morgan expects UOL&rsquo s hospitality division to drive an earnings recovery before more significant contributions from new residential sites in 2H2024 and 2025. UOL&rsquo s share price has suffered because it was removed from the MSCI on Feb 29.