CIMB Research 2015-07-24: CapitaLand Commercial Trust - A well-positioned REIT. Upgrade to ADD.

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A well-positioned REIT 

• CCT’s 2Q15 results were in line with our estimates. 
• 2Q DPU came in at 25% of our full-year forecast, taking 1H DPU to 49%. 
• Though we remain cautious about the outlook for the office segment due to the anticipated excess supply of office space in 2016, we favour CCT for its 
  1. strong balance sheet, 
  2. potential acquisition of the remaining 60% stake in CapitaGreen, and 
  3. stable portfolio outlook. 
• We believe CCT is oversold, having corrected 23% from its share price peak in Jan 15. 
• We upgrade the stock from hold to Add, with an unchanged DDM-based target price of S$1.69. 

Higher committed occupancy at CG 

• CapitaCommercial Trust (CCT) reported a stable set of results, with 2Q revenue rising by 5.0% yoy and DPU increasing by 0.5% yoy. 
• The increase came largely from higher rental income across its portfolio though part of it was offset by higher property tax. 
• For the quarter, CapitaGreen (CG) secured a stronger occupancy of 80.4% (69.9% in 1Q15), bringing the portfolio’s committed occupancy rate to 98.0% (97.0% in 1Q15). 

Stable outlook with further debt headroom for acquisitions 

• For the rest of 2015, only 6% (4% in office space and 2% in retail space) of CCT’s portfolio by gross rental income is due for renewal. 
• With the average rental rate hovering around S$8.59 psf/mth vs. the average grade A office market rent of S$11.30 psf/mth, we expect positive rental reversion for these upcoming leases. 
• Looking ahead, with only 15% of gross rental income due for renewal in 2016, coupled with the strong momentum in securing tenants for CG, we are of the view that CCT’s outlook remains stable in 2015/16 despite the upcoming large supply. 
• Furthermore, at 29.5%, CCT is noted to have one of the lowest leverage ratios in the S-REIT market, giving it further debt headroom of S$1.3bn (at 40% leverage ratio) for future acquisitions. 

Upgrade to Add 

• Given its stable outlook, we believe CCT is oversold, having corrected 23% from its peak in Jan 15. 
• Offering FY15/16 dividend yields of 6.0%/6.3%, coupled with its low leverage ratio vs. its closest peer’s 6.0% and the sector average of 37.6%, CCT is well-positioned to weather potential risks in the S-REIT market while offering inorganic growth when it acquires the 60% stake in CG in the long run. 
• Upgrade to Add. 

(PANG Ti Wee; LOCK Mun Yee; TAN Xuan, CFA)

Source: http://research.itradecimb.com/