CapitaLand Commercial Trust (CCT SP) - Maybank Kim Eng 2017-05-02: Sale to Fund Next Phase

CapitaLand Commercial Trust (CCT SP) - Maybank Kim Eng 2017-05-02: Sale to Fund Next Phase CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust (CCT SP) - Sale to Fund Next Phase


Positives from the deal; remains top office pick 

  • We see two positives from CCT’s recent sale of a 50% stake in One George Street (OGS)
    • Firstly, a narrow 3.2% NPI yield and 16.7% premium over book reinforce our view that the REIT is undervalued against physical-market prices. 
    • Secondly, the deal should lower its leverage to 32.9%, providing debt headroom for its next project possibly without the need for major fund-raising. 
  • We reiterate CCT as our top office pick with catalysts expected from a bottom for Singapore’s office market. No change in DPU pending deal completion and capital deployment. Our TP is unchanged at SGD1.81, based on a yield target of 5.0%. 
  • Risks: sharp retreats in office rents and cost overruns for redevelopment projects.


Sale of 50% stake in One George Street 

  • CCT announced the sale of a 50% stake in OGS to insurer FWD Group. The property will be injected into a limited liability partnership (OGS LLP), which will be jointly held by the partners, for SGD1,183.2m or SGD2,650 psf. The sale price is a 16.7% premium over OGS’s carrying value of SGD1,014m or SGD2,271 psf. It implies a yield of 3.2% over its NPI of SGD38m. 
  • CCT expects to book a net gain of SGD79.7m.


Finer details 

  • In the initial two years, OGS LLP may direct CCT’s share of income to its JV partner if an agreed ROE is not met. However, the amount will not be more than 50% of the asset-management fees payable by OGS LLP. 
  • At the higher end of the range, management estimates that SGD2.3m could be directed to its partner over two years. CAPL (CAPL SP, TP SGD3.70) remains OGS’s asset and property manager.


Reduces funding needs for next project 

  • Assuming that the proceeds are used to pay down debt, we estimate that CCT’s aggregate leverage will fall to 32.9% from 38.1%. This implies debt headroom for SGD0.97b/1.8b to a gearing of 40%/45%. 
  • While it could potentially fund its entire Golden Shoe redevelopment single-handedly, we expect management to fill its income void and diversify development risks with another core asset. Hence, participating in the parent’s potential purchase of Asia Square Tower 2 cannot be ruled out.


Reinforces our view of undervalue 

  • The deal’s narrow cap rate reinforces our view that CCT is undervalued against physical-market prices. Its unit price implies just SGD1,900 psf and a cap rate of 4.6% for its Singapore offices.


Swing Factors


Upside

  • Appreciation in capital value of its properties.
  • Successful 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/ 2017-05-02
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.810 Same 1.810



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