CapitaLand Commercial Trust - CIMB Research 2016-01-20: Higher occupancy underpins earnings

CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust - Higher occupancy underpins earnings

FY15 DPU in line, at 97% of our forecast.
Continued to enjoy positive rental reversions with high tenant retention rate in FY15.
FY16 focus to be on maintaining occupancy amid large incoming supply in the market this year and next.
Low gearing; potential for inorganic drivers.

CCT reported DPU of 2.17 Scts for 4Q15 (+0.9% yoy) and 8.62 Scts for FY15 (+1.9%), largely within expectations. The improvement was underpinned by higher revenue as it continued to benefit from increased portfolio occupancy of 97.1% and positive rental reversions, particularly at Capital Tower and 6 Battery Rd.
It also completed an S$35m AEI at Capital Tower and achieved ROI of 8.2%. In 2H15, the trust enjoyed a revaluation surplus of S$50.6m, with cap rates unchanged; this increased its BV to S$1.77/unit.

CCT renewed 205,000sf of leases in 4Q15, with demand coming from the TMT, financial services and energy, maritime and logistics sectors. This was achieved on the back of 3.4% yoy higher reversion levels.
Tenant retention remained relatively stable at 83%.

Underpinning FY16 earnings are positive contributions from 40%-owned CapitaGreen (take up of 91.3%).
CCT has 7% and 10% of its gross rental income to be re-contracted in FY16 and F17, respectively. With expiring rents in FY16 averaging S$9.57psf/mth and have c.10% spread over current spot rents, we expect lease renewals to remain fairly neutral as market rents slide this year with the incoming new supply.
FY17 remains challenging as average expiring rents will be at a higher S$10.26psf/mth, in our view.

With a low gearing of 29.5%, CCT is well placed to explore acquisition growth, although with a portfolio net property yield of 4.6%, it may be somewhat challenging to get DPU accretive purchases.
It has an option to buy the remaining 60% stake in CapitaGreen.
CCT has significant debt headroom of S$1.3bn (assuming a 40% leverage ratio).
Recent media reports indicate that the trust could sell its One George St property. If this materialises, it would provide CCT more headroom to explore more opportunities.

We maintain our Add call, with a lower DDM-based target price of S$1.48, as we finetune our rent assumptions and raise our cost of equity slightly to 8.1%.
CCT offers investors FY16 DPU yield of 6.3%.

LOCK Mun Yee CIMB Securities | http://research.itradecimb.com/ 2016-01-20

CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 1.48 Down 1.65