CAPITALAND COMMERCIAL TRUST
C61U.SI
CapitaLand Commercial Trust - Visible growth
- 2Q16 DPU of 2.20 Scts (+0.5% y-o-y) in line with expectations.
- Contribution from CapitaGreen to ramp up in 2H16.
- Roll forward to FY17, TP raised to S$1.70 from S$1.61.
Timely acquisition of CapitaGreen.
- Despite the expected decline in the office market, we believe the timely acquisition of the remaining 60% of CapitaGreen not only helps to offset potential negative rental reversions and lower occupancies for the rest of CapitaLand Commercial Trust (CCT)’s portfolio but will allow CCT to deliver a 2-year DPU CAGR of 4% (2015- 2017), which is among the highest in the office sector (average of 1.4%) and above the S-REIT DPU CAGR of 1.7%.
Trading at a discount to physical office transactions.
- Investors have been concerned over the value of CCT’s portfolio given the decline in office rents. We believe this is unwarranted given the resiliency of office property values in Singapore.
- CCT’s Singapore Grade A office portfolio trades at an implied value of c.S$1,900 psf compared to recent sales of between c.S$2,700 (adjusted for 99-year leasehold for CapitaGreen) and $3,500.
- While CCT’s Grade A portfolio is unlikely to trade up to an implied c.S$2,700 given the older profile of some of its properties, we believe the current strength of the physical market and 999-year leasehold status of some of its buildings, warrants CCT to trade close to its book value per share of S$1.72 or an implied valuation of S$2,000 psf.
Defensive lease profile with the expiry of the majority of leases coinciding with an expected upturn in the office market.
- 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 FY19 and beyond, CCT offers investors a good measure of earnings visibility and stability amid record office completions over the next two years.
- CCT should also benefit when the majority of its leases are renewed post FY19 as the Singapore office market should be on an upturn then, as no new office buildings will be completed from FY18 onwards.
Valuation:
- After incorporating the conversion of convertible bonds in September 2017 and rolling forward our valuation to FY17, we raise our DCF-based TP to S$1.70 from S$1.61.
Key Risks to Our View:
- A key risk to our view is new office supply causing spot rents to fall below S$7 psf, which is likely to lead to lower-than- expected asking rents and rental income.
Mervin Song CFA
DBS Vickers
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Derek Tan
DBS Vickers
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http://www.dbsvickers.com/
2016-07-21
DBS Vickers
SGX Stock
Analyst Report
1.70
Up
1.61
