RHB Bank Singapore analyst Vijay Natarajan’s latest research note on City Developments Limited (CDL) may be titled “a fall from grace”, but he believes a big shake-up could unlock value.
Natarajan’s latest note, released March 3, follows a string of analyst downgrades last week. A boardroom tussle between chairman Kwek Leng Beng and his son, CDL CEO Sherman Kwek, broke out on Feb 26 — the day of CDL’s full-year results. Both parties have lobbed accusations at each other, while CDL’s board of directors have taken sides in the fracas.
As such, Natarajan has downgraded CDL to “neutral” from “buy” with a massive 35% cut to his target price to $4.75 from $7.30 previously. This marks RHB’s biggest cut to CDL’s target price in recent years; the brokerage’s highest target price on CDL over the past four years was $9.80, issued in April 2022 and March 2023.
The new target price is below CDL’s current trading price; shares resumed trading on March 3 after being halted pre-market on Feb 26.
Natarajan’s target price is now pegged to a higher 65% discount to its revalued net asset value (RNAV), up from 50% previously.
See also: This week's cover story: Generational shift at City Developments
The analyst also slashed his environmental, social and governance (ESG) premium on his target price to a 2% discount from a 4% premium previously. This is calculated based on RHB’s proprietary methodology.
‘Another blow to CDL’
Natarajan says the board tussle comes as another major blow to CDL, which faced corporate governance issues in 2021 over its Sincere Property Group investment losses of around $1.9 billion.
See also: DBS is RHB’s top pick with dividend yield ‘too good to ignore’
CDL’s share price has underperformed — nearly halving over the last five years — amid weak return on equity and an asset-heavy strategy, which resulted in high interest costs, notes Natarajan.
“Major lapses in board independence and governance issues have cast a shadow on its medium-term outlook and potential next steps… We believe the recent lapses will make it hard for long-only institutional investors to hold CDL as a part of their portfolio, resulting in further selling pressure upon resumption,” says Natarajan.
In May 2024, CDL was among five Singapore-listed companies that were dropped from the MSCI Global Standard Indexes.
FY2024 miss
In addition, CDL’s results for FY2024 ended Dec 31, 2024 missed estimates on the back of lower-than-expected development profits.
CDL, however, benefitted from a pick-up in Singapore residential sales momentum, with the group selling 1,489 units with a total sales value of some $3 billion during the year, double y-o-y.
For FY2024, the group achieved total divestment of $600 million, falling short of its initial guidance of $1 billion.
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Net gearing is relatively high at 69%, says Natarajan, up from 61% in FY2023, while average borrowing costs are starting to moderate at 4.4%, down from 4.5% at the end of 1HFY2024.
“Operationally, CDL’s Singapore portfolio continues to perform strongly, while overseas market conditions are stabilising. Hospitality segment growth is expected to normalise after a strong performance over the last two years. Gearing is on the high side, and more divestments are needed to improve profitability,” says Natarajan.
Unlocking value
Still, Natarajan believes a major shake-up could unlock value. “Intrinsically, CDL is trading at a very deep discount of [more than] 60% to our RNAV with a majority (50%) of it being in Singapore.”
A complete revamp of CDL’s board and strategy with additional safeguards in place could unlock value, says Natarajan. In addition, CDL could potentially break up its business segments and list them as separate entities.
Finally, Natarajan thinks CDL could stand to gain from a partial privatisation and transitioning to an asset-light strategy.
As at 9.45am, shares in CDL are trading 21 cents lower, or 4.1% down, at $4.91.
Read more about the developing story at CDL on our microsite:
- This week's cover story: Generational shift at City Developments
- CDL shares down more than 5% upon trading resumption (March 3)
- Urgency of court application stems from disruption of CDL’s corporate structure; Phillip Yeo sees saga as distraction (Feb 28)
- Primary reason behind CDL’s dispute is related to M&C board advisor Dr Catherine Wu, says Sherman Kwek (Feb 27)
- CDL sees downgrades and target price cuts from analysts who still see silver linings (Feb 27)
- CDL board fight cools with undertaking from two new IDs (Feb 26)
- Sherman Kwek to remain as group CEO of CDL; finds episode 'incredibly disappointing' (Feb 26)
- Father and son battle it out in court for control for CDL (Feb 26)
- CDL calls for trading halt, cancels FY2024 results briefing (Feb 26)
- City Developments' FY2024 patmi falls 36.6% as gearing rises to 117% (Feb 26)
