(Stocks Discussion) SGX: City Developments Limited (SGX: C09)?

City Developments offers quality real estate options in Singapore dabbling in both residential and office spaces. The share price has rosed from $8+ to its current $11, a rather whopping increase considering its a hefty stock as compared to Capitaland. I will definitely consider entering if it falls back below $10

TL;DR Huge negative free cashflow due to poorer working capital conditions, high financing for acquisitions and capital expenditures.

Business Profile

City Development may not be a household name, but its reach into Singapore’s real estate ecosystem is massive. They are one of the pioneers of this sector, and is a property and hotel conglomerate involved in real estate development and investment, hotel ownership and management, and facility management. 

Financials

Income Statement

Revenue had increased YOY significantly to 4.2bn by 10.5%. There was a more than 50% decrease in operating YOY and coupled with higher tax expense, net profit for the year seemed to be almost the same. To me, this seems like a positive sign because normal operating activities had generated greater returns. despite higher tax expenses. 

Balance Sheet 

Significant YOY changes include a large increase of investment properties and financial assets, mainly due to the acquisition of subsidiaries. Current ratio is around 3, which shows that the business has a strong short-term liquidity position. Debt/Equity is a comfortable 0.5, which suggest that long term solvency and leverage seems appropriate. 

Cashflow Statement

Cashflow from operating activities was negative mainly due to much worse off working capital management. The main driver of this was cash tied up in the development of properties and decreases in trade and other payables and contract liabilities. 

Cashflow from investing activities was almost 17 times higher due to a large proportion of cash used to acquire new subsidiaries. 

However, cashflow from financing activities turned a positive due to cash inflows of proceeds from their revolving credit facilities and bank borrowings. Overall, cashflow for the year was still negative. 

Free Cashflow for the year was almost 2bn due to a huge negative operating cashflow and high expenditure for subsidiaries, capital expenditures and joint ventures. 

Future Potential

With the negative sentiment in property prices here and CDL holding the largest unsold inventory among developers, future prospects don’t look too good. It seems that growth overseas may be more positive, with office buildings in the UK and elsewhere helping to boost net income. 

However, here at home, depressed property prices and a lack of sentiment may cause future earnings here to decrease. Unsold inventory may also lead to inventory write downs, which may decrease balance sheet strength while incurring impairment losses which reduces net income. 

Potential for higher interest rates may also adversely affect the market, making the cost of borrowing even higher for more expensive purchases like property.