Since 19 Oct 2020, City Dev has fallen nine out of ten sessions with a cumulative drop of 20%. City Dev closed at $6.20.
Let’s take a look why this City Dev has slumped and why it has caught my attention.
Reasons why City Dev has underperformed
The below list of likely reasons is not exhaustive. It is just based on my personal view what may have caused City Dev’s underperformance.
1) Concerns over how much support is required by Sincere Property Group
Concerns over how much support is required by Sincere Property Group (“Sincere”) flare up again after the resignation of Mr Kwek Leng Peck as a Non-Executive and Non-Independent Director of City Dev. Mr Kwek resigned, citing
a) disagreements with the Board and management in relation to the Group’s investment in Sincere and its continuing provision of financial support to Sincere;
b) his reservations with the Group’s approach in the management of Millennium & Copthorne Hotels Limited (“M&C”).
Based on City Dev’s announcement, its total investment in Sincere includes a 51% joint venture equity investment in Sincere of RMB 4.b, US$230m subscription of bonds issued by Sincere and a working capital loan of RMB 650m. In addition, the Group also provided a liquidity support undertaking totalling RMB 1.5b relating to the bonds issued by Sincere that are maturing on 26 October 2020 and a RMB 1.5b corporate guarantee in relation to an external bank loan obtained by Sincere.
Analysts have mixed views on what is the worst case that Sincere may require in terms of funds. JP Morgan estimates City Dev may need to inject up to S$1.6b in equity, whereas Macq estimates that City Dev may need to inject S$1.05b in Sincere, and up to S$2.9b in Sincere in the worst case scenario, should City Dev be required to backstop all Sincere’s short term debt.
2) Sentiment in property plays has weakened
Sentiment in property plays as represented by FTSE ST Real Estate Holding and Development Index (FSTAS8630.SI) has weakened. Since 19 Oct 2020, FSTAS8630.SI has dropped 8.5% vis-à-vis 4.0% drop in STI. Thus, property sector as a whole underperforms STI which may cast a dampener on City Dev’s share price.
With all the seemingly negative news, what attracts me to City Dev?
There are four main reasons why City Dev attracts me.
1) Extremely oversold by RSI
Based on Chart 1 below, it is evident that City Dev has been entrenched in a strong downtrend with all exponential moving averages turning downwards. Price decline has been accompanied with above average volume which is rather bearish. However, City Dev has fallen nine out of ten sessions with a cumulative drop of 20% which pushes its RSI to an oversold level of 13.3. MFI closed at a similar oversold region 10.3. Since 2000, there were only three occasions where RSI is lower than now, with the lowest RSI at 10.8. If I exclude the period 16 – 23 Mar 2020 (i.e. the period where stocks fell sharply), there was only one occasion where RSI was lower than now with the lowest RSI at 12.8. Based on chart, it is likely that downside may be limited in the near term as extreme oversold pressures build.
Near term supports: S$6.18 – 6.20 / 6.10 / 6.00 / 5.95
Near term resistances: S$6.33 / 6.48 – 6.52 / 6.65 / 6.70
Chart 1: City Dev closed near 23 Mar 2020 and 30 Apr 2009
Source: InvestingNote 2 Nov 2020
2) Downside may be limited based on analysts
Based on Figure 1 below, out of 17 analysts, 16 analysts rate City Dev a buy. Average analyst target is around $10.12. This represents a potential capital upside of around 63%. Coupled with an estimated dividend yield of around 2.1%, total potential return is around 65%! Readers can refer to City Dev’s analyst reports HERE.
Figure 1: Average analyst target $10.12; 63% potential capital upside
Source: Bloomberg 2 Nov 2020
3) Valuations are extremely attractive
City Dev trades at 0.55x P/BV. This is more than two standard deviations from its 2-year average P/BV of around 0.8x and close to two standard deviations from its 10 year average P/BV of around 1.1x.
4) Some medium-term catalysts
Some potential medium-term catalysts cited by the analysts or / and City Dev are
a) restructuring plans for City Dev’s hotel business, M&C, over the coming year may involve potential asset sales, thus reducing City Dev’s gearing and narrow the discount to its RNAV;
b) Spinning off its commercial assets located in the UK into a REIT to be listed on SGX;
c) Earnings may start to improve next year on a year on year basis as City Dev may sell more properties next year (at least there is unlikely to be a circuit breaker) and also on a low base effect.
The below list of risks is not exhaustive.
1) I am not familiar with City Dev
This is my first time looking at City Dev. Suffice to say that I am not familiar in City Dev’s fundamentals (my main basis is mostly technical and reference from analyst reports). Readers should do their own due diligence and exercise their independent judgement.
2) Gearing may increase
With the potential injection of funds into Sincere, it is likely that City Dev’s gearing (borrowings) may rise. An increase in gearing may result in more interest expenses being paid and reduces net profit etc.
3) Presence of selling pressure
For the past ten days, the drop in share price was accompanied with above average volume. This signifies that there is some selling pressure. There is definitely a possibility that there may be some bad news in City Dev known to the market, but unknown to me which causes the selling.
4) Price performance may depend on how much funds Sincere requires and City Dev’s upcoming results
Depending on how much funds Sincere requires and City Dev’s upcoming results, it is reasonable to assume that both factors are likely to be a driver of its share price. A larger than expected amount of funds required by Sincere, or / and poorer than expected results may fuel more selling pressure and vice versa.
5) There is no rule that RSI cannot go below 13.3
Although RSI is already at an extremely oversold level of 13.3, this does not mean that it will not drop further. However, on the balance of probability, it is less likely that City Dev can continue its drop without some form of bounce, as oversold pressures escalate, and amid a positive analyst base.
City Dev’s extremely oversold chart, low valuations and positive analyst reports attract me to City Dev, for a trading play. It is noteworthy that I am not familiar with City Dev’s fundamentals. This, coupled with potential injection of funds into Sincere and presence of selling pressure are some potential risks to take note. Readers, as usual, please do your own due diligence and exercise your independent judgement.
P.S: I have already notified my clients to take note of City Dev. I am vested in City Dev.
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