The CP1 Limited Grocon Alliance - Broker Advises Clients to Buy CIY

18th June, 2007

"the market is substantially undervaluing this business."

City Pacific announcement on CP1; Maintain BUY and $5.00 target.

CIY has announced sale of 19.9% stake in CP1 (Code CPK) to 17.9% Grocon (Grollo interests) and 2% to a further party, for a total transaction worth $38m.

The implied price is 80 cents for the CP1 holding vs. market of 74 cents, and represents a strategic tie up with Grocon for CIY (the transaction is to be completed prior to 30 June).

CIY will retain 30.6% of CP1, but will deconsolidate CP1, with two Grocon directors joining the board.

A number of immediate comments:

We regard Grocon as one of the better private construction domestic companies, having historically constructed 101 Collins St and the new stand in the MCG and other major projects around Australia (www.grocon.com.au). We believe this validates the development quality in Martha Cove and other projects CIY / CP1 is involved in.
We understand there is a range of opportunities to work with Grocon on future projects.
The move de-risks and allows CIY to book a profit (to be disclosed) on holding in CP1 and to release a portion of equity capital for the slate of new projects CIY is involved in, and which will now provide a strong pipeline over 3 year of projects and steady income flow.
Concerns about the CIY's mortgage fund were misplaced (in our view), and in any event are further strengthened by CIY introducing Grocon to CP1 and strengthening its financial capacity in meeting all obligations to the mortgage fund.

Maintain BUY and $5.00 price target on CIY, consider this news highlights the ability of CIY to undertake equity deals with the 'highest' quality developers in Australia.

Stock is cheap by comparison to peer property funds / developers (at 8.0x FY07 and 11% fully franked yield).

Consider CIY's earnings profile is steadily improving, and market is substantially undervaluing this business.

Regards to all

MARK TOPY
Research Analyst
Direct Line: (+61 3) 8803 0117
Facsimile: (+61 3) 8803 0199
Email: mtopy@psl.com.au
Website: www.psl.com.au
Patersons Securities Limited
Level 18, 90 Collins Street
Melbourne VIC 3000