CitySpring – DBS

Looks to be a safe bet

• 4Q10 cash earnings of S$24m better-than-expected

• DPU of 1.05Scts for 4Q10 in line; maintains similar quarterly guidance for full year-FY11

• Secure yield of 7.2% thus promises relative stability amidst markets spooked by macro concerns

• Upgrade to BUY at a revised TP of S$0.67

Basslink contribution props up numbers. The Group recorded net adjusted cash earnings of S$23.7m in 4Q10, up 10% y-o-y and more than double of the S$11m generated in 3Q10. This strong performance was driven by higher revenue contribution from Basslink – as a result of higher availability fees, higher Commercial Risk Sharing Mechanism (“CRSM”) payments from Hydro Tasmania and Telecom revenues. City Gas cash earnings, though, failed to fully make up for the shortfalls recorded earlier in the year, despite recovering 29% q-o-q in 4Q10 owing to relative stability in High Sulphur Fuel Oil (“HSFO”) prices.

Maintains 4.20Scts DPU guidance for FY11. We expect FY11 cash generation to be stable, compared to FY10, while CityGas earnings could potentially be better, owing to full year contribution from customers in newly opened malls and Integrated Resorts, and lower HSFO prices. Hence, we remain confident of management meeting their DPU guidance for FY11, barring any major M&A activity. The CRSM issue with Hydro Tasmania or negotiations on CityGas’ gas conversion programme is unlikely to affect payouts. Gross cash of about S$100m provides a buffer.

Safe and steady is good, for now. Given the evolving macro uncertainties arising from the risks of a slowdown in EZ, CitySpring looks like a relatively safe investment with stable assets largely insulated from economic cycles. Given that financing concerns have been largely resolved as well, we upgrade the stock to BUY with a revised DDM-based TP of S$0.67 (as we lower our WACC from 8.0% to 7.5%).