CapitaLand Commercial Trust (CCT SP) - Maybank Kim Eng 2017-07-19: Potential For Inorganic Growth

SGinvestors.io

CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust (CCT SP) - Potential For Inorganic Growth

Maintain BUY and SGD1.81 TP 

• 1H17 inline. Nonetheless, we trim FY17-19E DPU by < 1% to incorporate the recent divestments and build in full conversion of its outstanding CBs (SGD175m CB, convertible at SGD1.4265 by Sep 2017). 
• While its tax- exempt income can hold DPU steady into 2019, we believe another acquisition is necessary to prevent a DPU decline in the years beyond. 
• Debt headroom of c.SGD1.2b (post-divestment and CB conversion) can fund a sizeable acquisition even after considering funding needs for the redevelopment of Golden Shoe. 
• Maintain BUY with unchanged SGD1.81 Target Price, based on target yield of 5.0%. 
• We continue to like CCT for its steady DPUs, value creation from the redevelopment of Golden Shoe and potential for inorganic growth.

Results inline; Valuation up on cap rate compression 

• CCT's 1H17 DPU of 4.59 cts (+4.6% YoY) was in line at 51% of our full-year estimates. 
• Apart from the unexpected 8.8ppt dip in occupancy at Twenty Anson from the loss of two tenants, portfolio occupancy held steady. The trend of negative rental reversions is expected to continue due to the high expiring rents of SGD11.45 psf in 2018. 
• Consistent with our view for narrowing cap rates in the market, the valuation of its properties was raised by 2.8% as valuers cut cap / discount rates by 15/25bps.

Tax-exempt income can hold DPU steady into 2019 

• Currently, CCT has SGD34m of tax-exempt income that may be used to mitigate the loss of income from its recent divestments. After factoring in interest savings from debt repayment and CB conversions, we believe this amount is sufficient to keep DPU flat into 2019. 
• However, this tax- exempt income is not enough to hold up DPU in the years beyond as the recent divestments will have an NPI impact of about SGD37m.

Sufficient debt headroom for another acquisition 

• Taking into account its recent divestments and assuming full conversion of its outstanding CBs, we estimate CCT’s gearing will fall to 32% from the current 36%. This implies debt headroom of about SGD1.2b to a gearing of 40%. 
• Even after considering its SGD0.5b share of debt for the redevelopment of Golden Shoe, CCT has sufficient capacity for a sizeable acquisition to fill in the income void. 
• Management aims to acquire properties at higher yields than its recent divestments of 3.2-3.4%.

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/ 2017-07-19

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.810 Same 1.810