Run-up has taken stock above valuations at this stage of the cycle: The stock has risen 54% in the past month, outperforming a rising market by 28% over that timeframe, and is now at a 28% discount to our updated S$11.17/share RNAV for the stock. We believe the stock has run up beyond its fair value at this stage of the cycle and therefore downgrade our rating from Overweight to Neutral. We would be buyers of the stock towards S$6.70/share, a level it was at not two weeks ago.
1Q09 results did not contain any surprises: 1Q09 PATMI was S$83.1 million, down 49.6% Y/Y on the back of lower development profits and hospitality contributions from subsidiary Millennium & Copthorne. Rental income rose 22.4% Y/Y on still-positive rental reversions at the group’s investment properties. Book value was S$6.11/share (post-implementation of FRS40 rules on investment properties under development) and gearing ended the quarter at 46.6%.

City Developments has historically traded as one of the most liquid Singapore property proxies: The stock has recently been affected by the market’s uncertainties over the 33% joint venture South Beach project and its associate financing. We consider the prospects of an equity fund-raising by the company as very low, with the group’s gearing comfortable and few by way of cash flow pressure points in the medium term. We do, however, reduce our FY09-11 earnings estimates by 9-11% to take into account lower margins.

Price target trimmed to S$7.20, a 36% discount to RNAV (one standard deviation below the mean discount since 1990). Key risks: our EPS estimates are substantially below consensus, and earnings estimate downgrades could prompt a reversal in the stock’s recent outperformance. Key upside risks to our rating and price target would come from a significant increase in the risk appetite for Singapore real estate assets or global hospitality properties.