OCBC Investment Research has lowered their target price for City Developments Limited C09 4.4% (CDL) to $7.20 from $8.87 previously, as the team expects further asset impairments in the upcoming full year results to be released on Feb 28. 

 

The research team says that it was &ldquo not surprising&rdquo that CDL announced in late Dec that it expects to record a significant decline in its attributable profit for FY2023, given the spike in interest rates in 2023. 

 

Although CDL has shown clear signs of recovery from the pandemic across its various business operations, OCBC&rsquo s analysts say that management has pushed out its target of achieving US$5 billion ($6.73 billion) in assets under management from 2023 to 2024 due largely to lacklustre capital market conditions. 

 

&ldquo Besides the absence of substantial divestment gains in FY2022, we believe CDL would also be providing for further impairment losses for its investment properties portfolio, especially for its UK assets. This would be due to higher capitalisation rates and any fair value losses recorded are non-cash in nature,&rdquo they say. 

 

Although CDL&rsquo s overall business performance has not been significantly impacted by the macroeconomic environment in FY2023 as compared FY2022, the impairment losses would likely result in a higher net gearing ratio for the group. 

 

Even though Singapore&rsquo s private residential property prices rose 6.8% in 2023, CDL&rsquo s project launches in 2023 drew mixed responses &mdash its transaction volumes were &ldquo subdued&rdquo , says OCBC&rsquo s research team. 

 

The Urban Redevelopment Authority found that Singapore&rsquo s private residential property prices grew 2.8% q-o-q in 4QFY2023 to 6.8% for 2023, a slight moderation as compared to 2022&rsquo s 8.6% increase but surpassing market expectations.

 

Given the firmness in home prices which affected affordability and the significant 60% additional buyer&rsquo s stamp duty (ABSD) imposed on foreigners, transaction volumes took a hit, OCBC notes. Total homes sold in the primary market by developers amounted to 6,400 in 2023, which was a decline of 9.6% versus 2022.

 

CDL&rsquo s Tembusu Grand project sold 340 of its 638 units (53%) during its launch weekend, but it' s The Myst new launch project only sold 27% of its units on the launch weekend. Over the weekend of Jan 27, CDL launched its 512-unit Lumina Grand Executive Condominium (EC) project located at Bukit Batok West Avenue 5, in which 269 units, or 53% of units were sold at an average price of SG$1,464 per square foot, as of noon on Jan 28. 

As at Jan 31, CDL is trading at a low price-to-book (P/B) multiple of 0.57x, or 1.5 standard deviations below its 10 year average of 0.77. 

 

&ldquo We believe its valuations will remain cheap even after expected asset write-downs for its upcoming FY2023 results,&rdquo says OCBC&rsquo s research team. &ldquo However, we believe there is a lack of re-rating catalysts for Singapore developer stocks including CDL, even as rates trend downwards.&rdquo

 

As such, the analysts have factored in a higher revalued net asset value discount of 41%, which also incorporates an environmental, social and governance premium, and derived a target price of $7.20.