[SINGAPORE] News of City Developments Ltd’s (CDL) sale of its 50.1 per cent majority stake in the South Beach mixed project put some bounce in the property developer’s share price last week, but analysts were less sanguine, due to the company’s high debt and interest costs.
The S$834.2 million divestment is expected to unlock S$465 million in disposal gains that would help trim CDL’s bank borrowings, which stood at S$1.2 billion as at end-2024. This would improve net gearing by 14 basis points, from 117 per cent to 103 per cent, noted UOB Kay Hian analyst Adrian Loh.
“However, we found it interesting that the company also chose to add that the capital unlocked would allow it to pursue new acquisitions, which were one of the factors contributing to its current high levels of gearing,” he added.
In FY2024, CDL’s group interest cost surged to S$588.7 million from S$485.8 million the year before due to a higher loan burden. Total interest-bearing borrowings rose to S$13.3 billion from S$11.6 billion in 2023.
Loh expects CDL to post similar interest expenses this year, especially since expectations for the US Federal Reserve making significant rate cuts are fading.
CDL’s board believes the sale aligns with its strategic focus on capital recycling. The group aims to divest S$1 billion in assets, and has announced about S$600 million in divestments so far.
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Its gearing aside, the developer’s other financial ratios offer upsides. Assuming the South Beach transaction had been completed at the end of 2024, CDL’s net tangible assets per share would have risen 5 per cent to S$10.68, said Loh.
Meanwhile, the gains from the sale would have boosted the company’s earnings per share by 2.3 times to S$0.712, he added.
The analyst also said: “Executive chairman Kwek Leng Beng and CEO Sherman Kwek were both in concurrence that this was a strategic divestment and a good opportunity to crystallise its value.”
Loh maintained a “hold” call on the stock, with a target price of S$4.60, a 12.4 per cent downside from Friday’s (Jun 6) closing price of S$5.25.
He added that further capital recycling efforts to deleverage and a more consistent execution of this strategy are necessary to re-rate the stock.
