CapitaLand Commercial Trust (CCT SP) - Maybank Kim Eng 2016-09-08: Top sector pick

CapitaLand Commercial Trust (CCT SP) - Maybank Kim Eng 2016-09-08: Top sector pick CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust (CCT SP) - Top sector pick


    U/G to BUY; top office pick 

    • We upgrade CCT to BUY from HOLD with a higher yield-based TP of SGD1.81. 
    • Our new target yield of 5.0% (from 5.75%) is its lowest since GFC, reflecting stable capital values for office properties and a potential bottoming of office rents in the next 5-6 quarters. We believe the market could start to focus on a bottom for the sector. 
    • Low interest rates should also sustain the global hunt for yields, including stable income-producing office REITs. 
    • CCT is our top office pick.


    Clean & clear DPU growth 

    • While rental reversions could turn negative in the year ahead, we believe incremental contributions from CapitaGreen will support income. 
    • We lower DPUs by up to 2.1% after cutting market-rent assumptions across the board. Nonetheless, our new forecasts still imply rising DPUs for CCT.


    Conservative valuation of assets 

    • Assumptions used by the valuers of its office assets are not aggressive against recent transactions in the market and peers. 
    • Majority of CCT’s offices have been valued at 3.85-4.25% cap rates. Only two 999-year leasehold assets, Six Battery Road and HSBC Building, have been valued lower, at 3.75%. This compares with the 3.75% used for various 99-year leasehold assets held by KREIT (BUY, TP SGD1.21) and Suntec REIT (HOLD, TP SGD1.81). Office buildings have been transacting at low cap rates of around 3%.


    Risks 

    • Our forecasts assume a bottoming of office rents by end-2017 and the start of a recovery in 2018. A prolonged office downcycle poses risks to our estimates.


    Swing Factors


    Upside

    • Appreciation in capital value of its properties.
    • Redevelopment of assets such as Golden Shoe Carpark.
    • Earlier-than-expected rebound in office rents.

    Downside

    • Sharper-than-expected declines in office rents or occupancy.
    • Overpaying for acquisitions.
    • Cost overruns in any redevelopment projects.




    Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-09-08
    Maybank Kim Eng SGX Stock Analyst Report BUY Upgrade HOLD 1.81 Up 1.520


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