CityDev reported 1Q09 net profit of S$83.1m (-49.6% YoY), or EPS of 9.1 S cents, in line with our estimates. We are downgrading CityDev to Underperform from Neutral. CityDev has rallied close to 75% from March lows, without a significant change in fundamentals.
Contribution from the residential segment was lower due to the absence of profit recognition from projects completed within 2008. Hotel operations remained under pressure. M&C reported 1Q09 results of £6.9m (S$15.3m), down 51% YoY. RevPAR was down 18.2%, with April registering a 22.9% fall YoY. We expect hotel earnings to remain weak for the year, with RevPAR likely to fall 25–30%.

Although profit from investment properties was up 47% YoY as a result of positive rent reversions, office occupancy fell 3ppt QoQ to 91%, as demand continued to weaken. In 1Q09, prime office rents fell 20% QoQ, and we do not anticipate a bottom until 2011, as weak demand is compounded by significant supply over the next few years.

The group’s launch schedule reflects our view that the recent recovery in sales volumes is not broad-based but limited to the mass-market segment. CityDev is fast-tracking the mass-market project at the former Hong Leong Garden condo for launch by 4Q09, whilst continuing to delay the launch of The Quayside Isle on Sentosa island. Although construction at The Quayside Isle is progressing on expected completion in 2011, CityDev will launch it possibly only when completed or near completion, with a view of better returns.
Our current RNAV of S$9.50 assumes that overall residential prices fall 15% and office rents correct by 30% this year. Given weak asset markets and the magnitude of declines already experienced by these two sectors in 1Q09 (-14% and -20%, respectively), our RNAV has further downside risks.

No change to our earnings estimates or target price of S$5.70, which is based on a 40% discount to RNAV of S$9.50. 12-month price target: S$5.70 based on a RNAV methodology. Catalyst: Weak sector fundamentals to persist for another six months.

CityDev is trading at an 11% discount to RNAV, which is already at parity to the long-term historical average. We think its recent share-price strength reflects the market chase for high-beta stocks. Fundamentals remain weak. Downgrade to Underperform from Neutral.