CapitaLand Commercial Trust - DBS Research 2016-04-15: Strength in adversity

CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust - Strength in adversity

Despite an uncertain office market outlook in 2016- 2017, CCT offers investors greater earnings certainty in the form of additional contribution from CapitaGreen. This should help offset the potential risk of negative rental reversions and lower occupancies for the rest of the portfolio in the next few years.
We project CCT to deliver 2-year DPU CAGR of 2.4%, which is commendable in the current environment.

CCT has maintained a defensive leasing strategy amid stiff competition for larger tenants by locking in longer term leases for most of its top 10 tenants.
With > 70% of office leases expiring in FY18 and beyond, CCT offers investors a measure of earnings stability and certainty amid record office completions over the next two years.
Earnings risk near term is also mitigated by the fact that the average rent of leases expiring in 2016 of S$9.42 are below current spot rents of S$9.90.

With gearing standing at only 30%, the lowest among office S-REITs, we believe there is potential upside to our DPU estimates if CCT triggers the option to purchase the remaining 60% stake in CapitaGreen that it does not own.

Given the substantial de-risking of CCT’s lease expiry profile this year, we have reduced our beta assumptions from 0.85 to 0.80, which results in our DCF-based TP rising to S$1.53 from S$1.45.
With CCT offering 14% 12-month total return (8% capital upside and 6.2% yield), we maintain our BUY call.

A key risk to our view is the new offices supply causing spot rents to fall below S$7 psf, which will likely lead to lower asking rents, coming in below our expectations.

Mervin Song CFA DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-04-15

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.53 Up 1.45