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

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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