A Singapore Exchange(SGX) announcement says the disposal is NTA accretive based on an FY2024 pro forma basis, taking NTA from $10.17 per share to $10.68. Pro forma gearing based on fair value will fall from 0.69 times to 0.63 times. Pro forma gearing based on historical cost will fall to 1.03 times from 1.17 times, while pro forma earnings per share will surge to 71.2 cents from 21.3 cents.
JP Morgan estimates that net gearing (including fair value on investment properties) will fall to 0.66 times from 0.72 times at end-1Q2025.
According to the SGX announcement, the rationale for the transaction is to reduce bank borrowings and improve net gearing ratios. Moreover, since acquiring the South Beach site in 2007 and completing South Beach in 2016, the property has reached maturity and in 1QFY2025 announced an occupancy of 92.4% and 92.5% for office and retail, respectively.
Market watchers dread Mortlake cost
See also: CDL to book gain of $465 mil after selling stake in South Beach to JV partner IOI Properties Group
Cash proceeds from the transaction will enable CDL to pursue new acquisitions, invest in upcoming pipeline development projects and optimise its capital management, CDL says. Among the projects it could be eyeing is the redevelopment of the Mortlake, Stag Brewery site in South West London. In its 1Q2025 business updates, CDL announced that the gross development value of the site is GBP1.1 billion ($1.92 billion).
JP Morgan says the sale of South Beach at book value will help close the large 50% discount to book and would be ROE-enhancing. “The next positive catalyst is a potential disposal of the former Stag Brewery site in Mortlake, South West London, that recently received planning approval and which CDL had acquired for GBP158 million ($335 million at the time of acquisition versus $274 million at the latest GBP/SGD rate) in 2015,” JP Morgan says.
UOB Kay Hian says: “We found it interesting that the company also chose to add that the capital unlocked would allow it to pursue new acquisitions, which was one of the factors contributing to its current high levels of gearing. CDL’s balance sheet will remain burdened by high interest costs and debt for 2025.”
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Another analyst who covers CDL reckons that the capital recycling is for the group to have sufficient funds to redevelop Mortlake, a decision which he believes will be viewed negatively by the market. The Mortlake redevelopment is significant.
In a business update on May 20, CDL said: “After undergoing a decade-long design and planning application process, the group finally obtained approval for a GBP1.1 billion residential-led mixed-use scheme on the former Stag Brewery site in Mortlake, South West London, for 1,068 homes, a 1,200 pupil secondary school academy, retail, offices, hotel, cinema and nine acres of green space. The group will review its plans for the site now that planning consent has been granted.”
What the biography says about South Beach
“We see this potential sale as an encouraging first step to CDL having a credible de-leveraging plan, given the prior reluctance to accede control of the project to IOI Properties and potential sentimental attachment to the South Beach site as described in the CDL chairman’s biography, Strictly Business,” JP Morgan says.
In the biography, author Peh Shing Huei describes chairman Kwek leaning on his business associates Dubai World and Elad Group, an Israeli real estate company, to joint-venture with CDL to develop the South Beach site. All three had a one-third stake. In 2011, Elad sold its stake to IOIPG.
“CDL and IOI restructured their interests to allow IOI to raise its stake to 49.9%. CDL would hold the majority stake in the consortium with 50.1%. Both sides pumped in fresh funds to redeem the mezzanine notes,” the biography says.
“Behind closed doors, teething problems came to the fore between CDL and IOI. The Malaysian side wanted parity and pushed the Singaporeans to sell the 0.1% to them. But Kwek, having been burnt by the Arab-Israeli saga, refused. Operationally, Kwek gave instructions to treat IOI as equal partners and consult the Malaysians on all major decisions,” the writer continues.
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According to official biographer Peh, Kwek Hong Png had started Hong Leong as a general trading company somewhere near the South Beach site. “Kwek Hong Png forged ahead with his new company in a shophouse along Beach Road, by the southern waterfront of Singapore. It is a location to which his son would return to nearly 70 years later with one of his iconic projects.”
A few wrong turns
In the past 25 years, CDL, once the darling of the institutions, took three wrong turns. The first involves spending around $1 billion on properties in and around London in 2013–2015, most of which are not as productive as their Singapore counterparts to this day. The Mortlake site is one of them.
As though acquiring unproductive properties was not enough, CDL spent GBP395 million (or $636 million at the time) in March 2023, buying St Katharine Docks from funds advised by Blackstone.
Secondly, CDL decided to privatise Millennium & Copthorne in 2019, just before the Covid pandemic. CDL, which owned a controlling 62.5% stake in Millennium & Copthorne (M&C) Hotels, bought back the remaining shares it did not own for GBP776.29 million and de-listed the company from the London Stock Exchange.
A third major wrong turn was the investment in Sincere Property Group. In 2019, just as CDL privatised M&C, it also decided to take a 24.1% stake in Sincere for the equivalent of $1.1 billion. During the due diligence phase, CDL decided to raise its stake in Sincere to 51.01%, paying an additional $880 million. Following the pandemic and the imposition of the three red lines, which were basically liquidity ratios for Chinese developers to comply with, CDL wrote off the $1.92 billion it had invested in Sincere.
With these three wrong turns, CDL’s gearing shot up, and by the end of 2024, it was well over 1 times, causing CDL to report two gearing ratios: one based on historical cost and the second based on fair value.
What of IOIPG?
Interestingly, IOIPG’s net gearing as at end-2024 stood at 0.7 times and its interest cover was just 1.07 times. However, IOIPG’s management has articulated that it is willing to study the feasibility of a REIT once IOI Central Boulevard Towers has stabilised. A mixed S-REIT comprising commercial and hospitality sectors at South Beach, coupled with the Grade-A office of IOI Central Boulevard, makes sense, market watchers reckon. “Why couldn’t CDL have REITed South Beach along with Republic Plaza?” wonders a market watcher.
IOIPG says in the press release it will keep “its options open for any opportunities by leveraging and optimising its position in creating additional value for its stakeholders”.
As for CDL, JP Morgan says: “While the sale is a positive development, given prior false dawns, the market will also want to see CDL being disciplined on the acquisition front, not just in non-core sales. This was best reflected in 2024, when CDL announced plans to sell $1 billion of non-core assets, of which only $600 million was achieved last year and with various acquisitions, resulted in net gearing (including the fair value on investment properties) rising to 0.69 times by 4Q2024 from 0.61 times in 4Q2023.”
JP Morgan retains a neutral rating on CDL with a price target of $4.85. UOB Kay Hian also retains a neutral rating on the stock, adding: “Further capital recycling efforts to de-leverage and a more consistent execution of this strategy are needed to re-rate the stock.” UOB Kay Hian has a target of $4.60 for CDL. The stock closed at $5.16 on June 5.
