With this, he has kept his “neutral” call on the stock at a higher target price of $4.90 from $4.70.
Natarajan says: “We also think CDL has not adequately addressed investors’ core concerns on recent board governance lapses and is yet to articulate a clear long-term strategy, which we believe will be a key re-rating catalyst.”
The South Beach asset comprises two office towers with a net lettable area (NLA) of 508,869 sq ft, retail space with an NLA of 30,797 sq ft and lastly, a JW Marriott hotel with 634 rooms and 190 luxury resident units, which were fully sold in September 2021.
Natarajan writes: “The sale price represents a 3% premium to CDL’s December 2024 valuation and we estimate a blended exit yield of around 4%. The sale will result in a net gain of $465 million for CDL and around a 5% uplift to its net tangible asset per share.”
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Meanwhile, he expects CDL’s net gearing to fall to 103% from 117% after the divestment.
“Including fair value gains on investment properties, the net gearing ratio will decline to 63%, which is still on the higher side when compared to peers,” writes Natarajan.
As of 1QFY2025, CDL’s net gearing rose slightly to 72%, following its payment for the acquisition of a mixed development site in Xintiandi, Shanghai, while its interest cover ratio fell to 1.4 times.
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In May, CDL also obtained planning approvals for the Stag Brewery site in Mortlake, which is set to be transformed into a GBP1.1 billion ($1.9 billion) residential-led mixed-use scheme.
Natarajan writes: “We think CDL could enter into a JV for redevelopment or sell the site, considering the heavy capital requirements. We do not anticipate any special dividends for FY2025 from the South Beach sale, given its high gearing.”
The group is also currently the top bidder for Lakeside Drive in Singapore, with a bid of $608 million or 1,132 per sq ft per plot ratio.
The RHB analyst notes that if successfully secured by CDL, the asset will be a good addition to its depleting land bank, given the healthy take-up at its new launches.
In 1QFY2025, CDL, including its JVs, sold 795 units with a sales revenue of $1.9 billion, up 155% y-o-y.
In 2HFY2025, the group plans to launch its Zion Road asset, a mixed-use integrated development, to which Natarajan expects healthy demand.
He has raised CDL’s revalued net asset value (RNAV) by 3% to $14.28 per share, considering the proposed South Beach divestment.
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Key drivers noted by the analyst include a resilient Singapore residential market with healthy unbilled sales, strong recovery in hospitality and a steady build-up of recurring income stream.
Lastly, CDL has a strong brand presence and track record in Singapore.
Conversely, key risks include long-drawn-out board issues resulting in a continued decline in performance, disappointing or negative returns from the group’s overseas ventures and a resurgence in interest rates.
Meanwhile, Citi Research analyst Brandon Lee has kept “buy” on CDL at a target of $9.51, believing that the sale will unlock significant value and deliver accretion to NAV.
He also expects an accelerated pace of asset monetisation to result in lower net gearing and higher dividends, which are key share price catalysts.
According to CDL, Lee notes the transaction will enable the group to recognise attributable sale consideration of $834.2 million, which will result in an FY2024 pro-forma earnings per share (EPS) accretion of 234.6% and NAV accretion of 5.1%.
Rationale for sale includes the strategic opportunity to unlock value created over the years, the property reaching its full maturity with the delivery of strong occupancy and stable income, and cash proceeds providing financial flexibility to reduce bank borrowings and improve net gearing while unlocking capital positioning.
Lee writes: “With gearing still at a relatively high level of 63% post sale of South Beach and CDL’s key focus for FY2025 being capital recycling, we believe CDL will continue exploring the sale of non-core assets, which we think could include properties in Singapore part of the global living sector portfolio and development sites in the UK.”
Key downside risks to his investment thesis that could impede the stock from reaching his target price include a weak take-up for residential launches, the introduction of additional cooling measures, a sharp economic slowdown, an over-expansion in overseas geographies and finally, execution issues in turning around the Millennium & Copthorne Hotels platform.
Meanwhile, UOB Kay Hian analyst Adrian Loh cheered the divestment, although he notes that CDL has “many debts to go”.
He notes that the sale would have improved CDL’s net gearing to 103% from 117% if the sale had been completed at the end of FY2024.
“However, CDL’s balance sheet will remain burdened by high interest costs and debts for FY2025. Further capital recycling efforts to deleverage and more consistent execution of this strategy are needed to re-rate the stock,” he writes. Loh has a “hold” call on CDL with an unchanged target price of $4.60.
