CapitaLand Commercial Trust - Time To Lock In Profits
- CCT’s share price has surged by 10% YTD outperforming the FSSTI (+9%) and SGX S-REIT Index (+8%).
- We believe the recent run-up in its share price has factored in most of the positives arising from the potential redevelopment of GSCP, which has obtained PP from URA.
- Downgrade to TAKE PROFIT (from Buy). With its share price hovering close to our SGD1.68 TP (3% upside), we recommend investors to lock in profits and re-enter at lower levels.
- Potential near-term catalysts are the lower-than-expected DP charges and sale of assets at premium-to-book value.
Provisional permission (PP) obtained for Golden Shoe Car Park’s (GSCP) redevelopment.
- This redevelopment has cleared the first hurdle of obtaining PP from the Urban Redevelopment Authority (URA).
- CapitaLand Commercial Trust (CCT) is currently awaiting for the assessment of the differential premium (DP) payable to complete the feasibility study. We expect it to be completed in the next 1-2 quarters.
- With the existing tenants already notified, GSCP would cease operations on 31 Jul 2017. GSCP is likely to add ~1m sqf of commercial GFA in Singapore’s central business district (CBD) when fully redeveloped. Management is currently evaluating various funding options, which includes a potential sale of assets and JV structures to mitigate fund raising concerns.
Office rental decline slowing down.
- Based on CB Richard Ellis’ (CBRE) 1Q17 data, rental for Grade A office buildings has declined at a slower pace of 1.6% QoQ vs 2.2% in 4Q16. Grade-A average office rents currently stands at 8.95 psf per month, down 22% from 1Q15’s peak.
- Pre-commitment levels for future supply remain relatively healthy based on CBRE data – Marina One (60% pre-leased) and UIC building (50% pre-leased). With office supply slowly tapering off post 2017, we expect rents to bottom out this year and start rebounding in 2018.
Convertible bonds likely to be exercised.
- About 80% of CCT’s borrowings are fixed, thus shielding the company from the risk of rising borrowing costs. It only has SGD175m of convertible bonds (coupon: 2.5% pa) due for refinancing in September.
- As the conversion price (SGD1.4265 ex-dividend) for convertible bonds is well below current share price levels, we expect at least a partial conversion into CCT shares.
- Our forecasts have already factored in the impact assuming full conversion into equity. A full conversion of convertible bonds would also lower gearing levels to 36.1% from 38.1%.
Downgrade to TAKE PROFIT
- Downgrade to TAKE PROFIT with an unchanged TP of SG1.68, which reflects a COE of 7.8% and TG of 1.5%.
- We have not factored in any potential upside from the redevelopment of GSCP, which is pending feasibility studies.
- At current share price levels, CCT offers FY17F-18F yields of 5.6%.