Core earnings grew by 30.8% in 1QFY08; strong fundamentals.

Synopsis : Adjusting for quoted investments, new target price is $13.19. Based on no further sales scenario, and backed by confirmed sales, RNAV per share is S$10.50. Buy on Weakness.

QoQ core earning grew 30.8% in 1QFY08. CDL achieved core earnings growth of 30.8% to S$165.0m on the back of revenue dip of 1.3% to S$758.8m in 1QFY08, compared to 1QFY07. All three business segments contributed to the earnings growth but the key contributor was the property development division.

The property development arm recorded 49.1% increase in PBT to S$155.1m on the back of a 9.4% decline in revenue to S$234.1m in 1QFY08, over 1QFY07. The decline in revenue was the result of lower revenue contributions under subsidiary level with the tail-end recognition of projects such as Residences @ Evelyn, The Imperial, Savannah CondoPark, Butterworth Lane, The Pier at Robertson and Monterey Park. The decline was, however, partially mitigated by revenue from One Shenton, The Solitaire, The Botannia and City Square Residences. PBT growth came largely from projects, under jointly-controlled entities, such as The Sail @ Marina Bay, Parc Emily, Ferraria Park, The Oceanfront @ Sentosa Cove, St Regis Residences, Cuscaden Residences and Edelweiss Park as well as the recognition of higher-margin projects launched in the past two years.

Under the hotel operations, PBT improved 24.5% to S$52.1m on the back of 1.2% increase in revenue to S$455.6m in 1QFY08, over 1QFY07. The growth came largely from improvement in the Group’s RevPAR and occupancy in New York and Singapore.

PBT from investment property improved 95.2% to S$25.1m on the back of 22.6% increase in revenue growth to S$57.1m in 1QFY08, over 1QFY07 as a result of overall improvement in occupancy and rental rates. The accelerated PBT growth was mainly due to strong rental growth, the recovery of property taxes from tenants as well as increased management fees and profit from CDL Hospitality Trusts.

Group gearing remained healthy. The gearing level as at 31 March 2008 was 0.64x, similar to the level as at 31 December 2007.

Investment Highlights & Prospects

Profits from pre-sold projects largely unrecognised. CDL has yet to recognize a substantial portion of profits from residential development projects sold over 2005 to 2007 as these projects are still in various phases of construction. These projects are expected to underpin CDL’s earnings growth over the next two to three years. Positive cashflow can also be expected with the collection of progress payments as construction work progresses.

The Group has lined up four projects for launch once market sentiment improves. These projects include 77-unit apartment, Shelford Suites, 336-unit condominium, The Arte @ Thomson, 724-unit mass market project at Pasir Ris Drive I and a 228-unit luxurious condominium, The Quayside @ Sentosa.

Positive office rental reversion despite rental pressure. In spite of the tight supply crunch faced in the Singapore office market, we believe the severity of the situation has abated. This is in view of the impact of the US sub-prime crisis on the real economy, which is expected to slow down expansion plans of businesses and in turn, dampen demand for office space going forward. Further, the expected completion of about 3.2m sqft of office space each in 2010 and 2011 is expected to cap rental increases for landlords as tenants have started to resist steep rental hikes.

Notwithstanding the macro outlook, rental rates are expected to escalate, albeit at a slower pace, in 2008. CDL, which owns close to 2.1m sqft of Grade A and Grade B office space, largely in the prime financial district in Singapore, is expected to continue to benefit from positive rental reversion over the next two years.

With steep hike in office rentals in the prime financial district, companies not requiring prestigious addresses have moved to outlying areas. To further tap on the strong demand for office space in the suburban areas, CDL is expediting the development of Tampines Concourse (net lettable area (NLA) of 105,000sqft) and Tampines Grande (NLA of 300,000sqft), which are expected to complete by March 2009 and June 2009 respectively.

Well-positioned to pursue opportunities arising from economic downturn. CDL’s hotel operation has a well spread out global presence, held largely through Millennium & Copthorne Hotels (M&C). Given its strong balance sheet with low debt, M&C is well-positioned to capitalize on attractive investment opportunities which may arise from the current weak economic climate, particularly in the US. Valuation and Recommendation. Adjusting for quoted investments, CDL has a fair value of S$14.66. In view of the current weak sentiment associated with the residential property market, which constitutes about 50% of CDL’s core operations, we apply a 10% discount to valuation to arrive at our target price of S$13.19.

Further, we did a study where we assumed a conservative scenario where 1) there is no further sales of development projects other than those already reported and 2) there is a 15% to 20% weakness in the capital values of investment properties. On this basis and backed by confirmed sales of development projects, CDL’s RNAV per share is S$10.50. Buy on Weakness.