Saturday, January 5, 2019

City Development - Is There Value In This Company At $8.08?

The revised cooling measures implemented in the middle of 2018 has finally pushed Q418 sales to a dip since Q217. It was only slightly down by 0.1% quarter on quarter and most of the decline was mainly due to landed sales so in all essence the demand for private property is still pretty buoyant.

With the introduction of the new cooling measures, which coincides along with the increase in tandem in interest rates, it brings the share price of City Development down from the 52 week high of $13.6 to the last closing price of $8.08.

That is a very sharp decline and if you are an investor who buys at the peak and it can get very painful to see your portfolio colored in a patriotic sea of red. 

But is there value now in the company after such a steep decline?




Cooling Measures In This Decade

For years since post gfc days when the first cooling measures was introduced in 2011, the demand for private property and residential has been pretty stable and moving. It never for once dent the expectations of the public that property prices are going to come down because of the measures put in place.

For those who waited, they have waited in vain as they look price stabilised after dropping about 10% from the very peak.

For developer companies like CDL, net margins on the residential properties they have sold in Singapore has been pretty constant throughout at 22%. As they continue to replenish their land banks by bidding tenders through open bidding and enbloc, there are continued demands to sell these properties off at a neat 20s% margins.

The Tapestry in Tampines saw 80% of the total 861 units were sold within the first two weekends at an average price of $1,360 / psf.

The Whistler Grand, being the latest project landed in the West most recently has sold off 160 units on the first weekend opening launch at an average price of $1,380 / psf.

These are outside the CCR region.

In the District 9 area, New Futura's 83 out of the 124 luxury units was sold last year in the opening weekend phase.

There were speculations and downward projections by analysts everytime after each new cooling measures was introduced but the demand has proven to rally stronger.

This feels like parents telling the education minister and public that they should tone down on the curriculum and education but look at what happen to tuition centers and how these parents who make the complaints are the very same parents who send their children rigorously to lessons.

Causation is a consequence and it goes round in loop.

2019 will be a bigger challenge as there is likely influx of supply thrown to the market to see if the demand can match up.



Discount to Book or RNAV

Analysing the fundamentals of the company is one thing, being an investor of the company is another.

As investors, you have your own required rate of return that you are expecting and if this doesn't materialize after a period of time, then it looks like a bad investment one angle or another, regardless how well the company has grown or is being run.

Your entry purchase price therefore matters or it'll affect your long term return as a consequence.

Those who bought at the 52 week peak versus one who bought at the 52 week trough will have a different thought of process when they sell their positions at the end of the day.

Usually, if you buy a dollar for 50 cents and ask the street if it's worth it, they'll tell you immediately that they can switch the wallet.

This is not the hardest part.

The hardest part is many developer companies have been valued at a discount to what they should be worth at.

Hence, you might always feel that they are justifiably "undervalued" all the time.


From the overall level, most developers are currently trading at a steep discount to their NAV, and is currently at a -1 SD valuation.

For City Development, their valuation is similarly close to -1 SD level, but there are more rooms to go down further if they want to match the 2016 and 2009 trough valuation level.

How Does City Development Compares Themselves Against Others?

The big boys are all trading at a steep discount to their book value.

If we revalue some of those assets, the discount gets even better for investors.

Take CDL for instance, while the Price to the Book is only at 0.72x, the Price to the RNAV is at 0.51x. The reason for this is due to the company not revaluing their investment assets and thus is recorded at cost in their book.



While they are all big traditional developers at one point in time, they have diversified their business model differently by focusing on different development at different geographical areas.

UOL and Hobee for instance have been diversifying into investment properties for some time to boost their recurring income. CDL has tried to follow suit by targeting a recurring EBITDA of $900 in their 10 years project timeline.

Capitaland has gone more into China while CDL and Hobee are targeting UK properties as their main overseas geographical areas for investment properties.

How Would I Play This?

Every developers are trading at a discount so they are all undervalued by its very nature.

Overseas diversification does not mean they are better, sometimes with all the foreign policy and forex impact, it can worsen the end result.

The cap rates for the investment properties are definitely more attractive than the local investment properties, and they are mostly freehold and yield a net property yield in excess of 5%, so you can see why everyone is gunning there.

I'd prefer to be paid while waiting so I would focus on property companies that paid the highest dividend yield while waiting for the industry to be re-rated.

CDL currently pays way too little dividend yield to my liking, so the entry price has got to be right at the trough of the valuation, else I might rather put my money in some undervalued Reits.

The Brexit impact is going to be felt quite badly in 2019, so I think we will see further downside and it will trough this year. That probably means we will not see good returns short term for CDL and Hobee, as well as Capitaland who is heavy in China. But that should give plenty of opportunities to investors who want to enter at the trough, and the rebound can give a decent return.

I don't fancy holding property counters long term due to the industry cycle which are uncertain and with discount rate going up.

Entering and exiting between the 0.5x to 0.7x range should yield better overall returns to the portfolio.

Thanks for reading.

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7 comments:

  1. Hi! Thanks for your concise and fantastic article! Much appreciated. Let me add my views here :
    - I agree with most of your points. It is right to value the property counters at a more "strict" level to Ensure your "margin of safety" as a retail investor. Hence with book value being fluctuate with forex, valuation vagaries etc etc, 0.5-0.6 P/BV ratio is good for established players
    - from my personal perspective , I have a small exposure to CDL, UOL and Oxley as well as CapitaLand. I bought small portions after July only but still in the red particularly with CDL and UOL
    - However, as you pointed out, recurrent rental income and diversification into hotels and short stay facilities are being implemented and will help cushion the cyclical effects of property
    - Finally, CDL pays pittance as dividends but the cash will come handy for projects
    - Singapore residential projects will be slowly released with most enblocs getting into trouble. CDL and UOL as well as CAPL have land-banked well to prepare for this
    My final take-
    I will buy more CDL at under 8, more UOL under 6, CAPL at 3 and wait. Land starved Singapore needs these guys and we will benefit if we are patient!!
    Enjoy your Sunday!!

    ReplyDelete
    Replies
    1. Hi Garudadri

      I agree that CDL below 8, UOL under 6 and CAPL under 3 is an opportunity. The only hard question is if there are better alternatives than that we can allocate our capital with.

      Sometimes the answer is yes and that makes buying developers all the way harder. Perhaps I set myself a stretch target, so even in the midst of all the good opportunities, I still need to find the best of the lot amongst them. I think we all do.

      Delete
  2. I see what You mean and understand. The sticks that I would think as suitable alternatives to invest are ones which I hold already. In this regard, I plan to diversify my portfolio as I want to not put too much into REITs and banks , which are the building blocks of my portfolio !

    ReplyDelete
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  5. Hi B,

    May I know how you derived RNAV for these counters? Thank you.

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