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City Development Limited’s 25% Fall in Profit Is Actually Better than It Looks

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Most investors do not like real estate-related shares now – the general impression is that the property cooling measures enacted by the Singapore government is taking a toll on both developers and private investors based here.

With City Developments Limited (SGX: C09) releasing its second quarter results yesterday and seeing its profit decline by 25%, it would seem that investors are right to stay away. But, there’s more than meets the eye. So, let’s dig in.

Overall performance

The company operates in three main segments: Property Development; Hotel Operations; and Rental Properties.

Let’s start with Hotel Operations first as it is generally the highest contributor to City Developments’ revenue. In the first half of 2014, the segment saw a 6.1% year-on-year increase in revenue to S$770 million as newly-acquired hotels Jumeriah Dhevanafushi and The Chelsea Harbour Hotel chipped in with new contributions. The former’s located in Maldives and was bought in December 2013; the latter sits in London and was acquired in March 2014.

Property Development is next and a quick glance at its numbers show that the property market in Singapore really isn’t that hot on first glance – revenue from the segment has been declining over the past few years. In the six months ended 30 June 2014, the segment saw sales drop by 5.5% to S$584 million compared to a year ago.

The last in line is Rental Properties, which had relatively stable revenue of S$187 million.

All told, City Developments’ total revenue for the first half of 2014 had inched up by 0.4% to S$1.595 billion. However, its net profit had dropped by 24.9% year-on-year (as mentioned earlier) to S$257.5 million. Coupled with the decline in revenue for City Developments’ Property Development segment, it again seems that investors might be right in steering clear of this property developer.

But, the drop in net profit had occurred because the company had recognised a huge one-off gain from the sale of certain assets in 2013. If the non-recurring gains were stripped off from its profit figure, we’re left with City Developments’ core earnings – and that figure had actually increased by 37.3% year-on-year. And interestingly, most of the growth in core earnings came from an 18% increase in profit from the Property Development segment. The discrepancy between the revenue and earnings growth in the segment is due to the fact that the company only recognises the profits from many of its joint venture projects in the segment – revenue’s not accounted for. Due to this accounting standard, there can be this false image that City Developments’ Property Development segment is weakening.

If an investor pays closer attention to the details, one might find that the company is in a much stronger position than first assumed.

Gearing ratio

City Developments’ gearing ratio had edged up at the end of the second quarter. As of 30 June 2014, its gearing ratio was at 33% with net borrowings of S$3.4 billion; this is a weaker balance sheet as compared to the end of 2013 when it had a gearing ratio of 25% with net borrowings of S$2.6 billion.

Foolish summary

It seems that CDL looking to aggressively expand its overseas markets. The group is focusing on UK, China, Japan, and Australia for its foreign adventures. This might be an indication that the company is wary of the prospects of Singapore’s property market and is looking for alternatives to grow its earnings.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn't own any shares of companies mention above