Impairments sullied decent operating performance. City Developments Limited (CDL) racked up a 57.4% YoY (-33.7% QoQ) fall in 4Q08 PATMI to S$100.0m, chiefly attributable to net impairment losses of S$90.8m related to M & C’s (53.5%-owned subsidiary) hotel assets in US, UK, Beijing and Bangkok. Excluding these and other one-off items, we estimate CDL’s core operating income would have inched lower by 2.3% YoY (+13.9% QoQ) to S$224.9m. FY08 PATMI of S$580.9m (-19.9% YoY) lagged our estimates (S$640.5m) and the Street’s (S$693.7m) by 9 – 16%. Dividends of 7.5¢ per share have been proposed.

Hoteliers’ path fraught with uncertainty. While we are pleasantly surprised that M & C chalked up a 7.6% YoY rise in FY08 RevPAR to £57.2 amidst the economic unrest, we note that 4Q08 occupancies for its hotels have decreased from six months ago: (i) US (-14.0% to 57.7%), (ii) Europe (-4.3% to 76.1%) and (iii) Asia (-0.3% to 75.7%). We believe this is a notable point as M & C typically derives more of its earnings in the second half of the year. Looking ahead, we think occupancies across all regions would be subjected to more downside pressures. We reckon ARR would be trimmed to target the increasingly economical-minded travellers, which could lead to drops in RevPAR and GOP Margins. As such, we have assumed a 10 – 20% fall in hotel’s topline contribution from 2009 – 2010.

Not aided by exposure to Singapore Property. We estimate CDL sold ~ 400 homes in FY08 (FY07: ~ 1,700 and FY06: ~ 1,400), bulk of which heralded from Livia. Although CDL’s Singapore-centric residential portfolio does present a good proxy to the current buoyant interest in mass market, we surmise buying sentiments here would taper off along with the mid and prime regions as the economy worsens. The only positive we can draw from is its low cost landbank, suggesting a lower possibility of impairments on its development properties in the event that residential prices further correct.

Maintain NEUTRAL at lower fair value of S$5.08. While we like CDL’s robust balance sheet (net gearing: 0.48x, interest cover: 11x and cash: S$776m) and prudent accounting treatment of investment property valuation, we are mindful of other share price constricting factors. These include the increasingly bleak hospitality sector and its substantial exposure to Singapore’s real estate sector (~ 79% of RNAV). We are introducing our FY10 estimates, leaving our residential price projections unchanged and pegging its listed subsidiaries to current market prices. In view of the above, FY09 EPS falls by 7.4% to 59.8¢, while base case RNAV drops to S$10.16 (previously S$11.05). Assuming a 50% discount, our fair value for CDL now falls to S$5.08 (previously S$5.53). Maintain NEUTRAL. Catalysts include decent take-up for Livia’s remaining units and The Arte (expected launch in Mar 09), as well as expansion of landbank at distressed valuations.