How Did City Developments Limited Fare In Its Latest Quarter Amid New Property Cooling Measures?

Property stocks have certainly taken a hit in recent months. The Singapore government’s sudden announcement of additional property cooling measures caused related stocks to tumble in July. City Developments Limited (SGX: C09), one of the three property developers in the Straits Times Index (SGX: ^STI) has been one of the hardest hit with prices down more than 26% year-to-date. Last week, CDL released its earnings results for the third quarter of 2018. Here are the important points to take note of.

The key numbers

1. Revenue for the quarter was up 17.7% to S$1.0 billion. Gross profit grew 13% to S$485.7 million.

2. Profit before tax was up 4.6% to S$242.5 million, with profit attributable to owners 10.4% higher at S$161.8 million.

3. Year-to-date, basic earnings per share was 48.4 cents, 25.7% higher than the corresponding period last year.

4. Net asset value per share was 6.5% higher at S$11.20.

5. The group is in a relatively strong financial position with net debt of S$2.8 billion, a net gearing ratio of 23% and interest coverage of 16.6 times.

Property development

CDL divides its business into four main segments — property development, hotel operations, rental properties and others. Property development consists of the development of land banks that are in turn sold off for one-time gains. For the third quarter of 2018, 46% of the group’s revenue came from its property development arm.

Source: CDL 2018Q3 Earnings Presentation

This segment was the main driver for revenue growth as revenue was 60.4% higher than the previous year.

However, there has been mixed performances from its recently-launched projects. The launch of Whistler Grand, its latest residential launch on 3 November, proved to be a hit with home buyers as 160 of the 240 units were sold over the weekend. On the flip side, other residential project such as The Jovell and South Beach Residences have not done so well. Only 20% and 24% of units released have been sold so far respectively.

CDL is very exposed to the residential market in Singapore. Including Whistler Grand, the group has seven more residential projects in its pipeline with six either already launched or expected to be launched by 2019.  Investors will probably need to continue observing the Singapore residential market to gauge the full effects of the new property cooling measures. Investors should take note that because of expected weaker demand, revenue from this segment is likely to fall sharply in the fourth quarter.

Recurring business

Hotel operations and rental properties represent the recurring income of the group’s business. Combined, the two segments contributed 51% of the CDL’s revenue and 33% of profit before tax.

The two segments, however, failed to register growth in the quarter, with revenue from the hotel operations and rental properties declining by 3.8% and 3.3% respectively.

On a positive note, the group has been actively looking to expand its recurring income portfolio and recently acquired properties in the UK and China. CDL acquired Aldgate House in London for £183 million and 125 Old Broad Street, former home of London Stock Exchange, for £385 million.

In China, the group acquired an office block within Yaojiang International Complex in Shanghai for RMB148 million.

With the residential market in Singapore uncertain, the group’s recurring income business will be an important income stabiliser in the coming quarters.

Looking ahead

According to the Urban Redevelopment Authority’s data, private residential prices continued to grow in the third quarter, albeit at a slower rate of 0.5%, compared to 3.4% and 3.9% in the second and first quarter respectively. CDL’s management believes this is a period of “consolidating prices” after the implementation of the additional property cooling measures which took effect on July 6.

Although developers sold 3,012 private residential units in the third quarter, 27% higher than in the previous quarter, the numbers could have been exaggerated due to high volume in the day before the new property cooling measures took effect. More pertinently, for the nine months up to September, developers saw a 20% decrease in sale transactions, which could mean a steep slowdown in sales since July.

Adding to this, CDL’s management highlighted:

“Against this challenging backdrop for Singapore private residential market, the Group is cognisant that sales volume for new residential launches will likely be impacted by the cooling measures as certain buyers adopt a wait-and-see approach, becoming more selective and price sensitive in their purchases.”

The Foolish conclusion

At the time of writing, City Developments’ shares trade at S$8.47 per piece, translating to a price-to-book ratio of 0.75 and a price-to-earnings ratio of 13.1. Despite a double-digit increase in profit attributable to owners in the quarter and depressed share price, the uncertain residential market in Singapore remains a concern for CDL.

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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 writer Jeremy Chia doesn’t own shares in any companies mentioned.