CLSA cuts City Developments stock rating after stake divestment

CLSA downgraded City Developments (CIT:SP) from Outperform to Hold, lowering the price target from SGD6.41 to SGD5.35, following the sale of its South Beach stake to IOI Properties for S$834.2 million, which will generate disposal gains of S$465 million and reduce gearing from 117% to 103%. While the transaction improves City Developments' financials, analysts believe the gearing remains too high for a special dividend, leading to adjusted financial forecasts through FY26 and a revised RNAV estimate from S$11.54 (FY25) to S$9.92 (FY26).

Analysis

CLSA analysts have downgraded City Developments (CIT:SP) to a Hold rating from Outperform, primarily due to the sale of its 50.1% stake in South Beach to IOI Properties for S$834.2 million. This transaction is projected to yield substantial disposal gains of S$465 million and will reduce the company's gearing significantly from 117% to 103%. Despite this deleveraging, CLSA contends that the resultant gearing of 103% remains too elevated to facilitate a special dividend, a key factor in their revised outlook. InvestingPro data indicates City Developments maintains certain financial strengths, including a healthy current ratio of 1.58, an impressive free cash flow yield of 17%, and a consistent 34-year dividend payment history. However, reflecting the ongoing gearing concerns and the impact of the divestment, CLSA has extended its financial forecasts to FY26 and revised its Real Net Asset Value (RNAV) estimate downwards from S$11.54 for FY25 to S$9.92 for FY26. Consequently, the price target for City Developments has been lowered from SGD6.41 to SGD5.35, signaling a more cautious stance on the stock's near-term prospects.

Key Decisions for Investors

• Investors should acknowledge the CLSA downgrade to Hold and the reduced price target of SGD5.35, factoring these into their valuation assessment of City Developments.
• While the South Beach divestment will improve the company's gearing to 103% and generate significant gains, the persistent high leverage level, as noted by CLSA, is expected to preclude a special dividend in the near term.
• Consider monitoring future deleveraging initiatives and management's capital allocation strategy, as further improvements in gearing could unlock shareholder value and potentially shift the outlook on capital returns.