CapitaLand Commercial Trust - DBS Research 2017-03-08: From HK with love

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CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust - From HK with love

• HK roadshow points to increasing demand from the technology sector due to build out of a technology ecosystem in Singapore.
• Still awaiting approval for redevelopment of Golden Shoe into “iconic” building.
• Potentially approaching bottom in office rents.

Timely acquisition of CapitaGreen. 

• Despite the expected decline in the office market, we believe the timely acquisition of the remaining 60% in 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 2% growth in DPU this year (excluding the impact from redevelopment of Golden Shoe and potential sale of Wilkie Edge). 
• The boost is already visible by the 10% y-o-y increase in 4Q16 DPU.

Trading at a discount to physical office transactions. 

• Investors have been concerned over the value of CCT’s portfolio which we believe is unwarranted. 
• CCT’s Singapore Grade A office portfolio trades at an implied value of c.S$2,000 per square foot (psf) compared to recent sales of between S$2,700- S$3,500 psf. 
• While CCT’s Grade A portfolio is unlikely to trade higher to 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 of S$1.73 per unit or an implied valuation of S$2,100 psf. 
• The next catalyst would be the sale of Wilkie Edge above book value.

Upside from redevelopment of Golden Shoe. 

• CCT intends to redevelop its Golden Shoe Car Park property. Subject to obtaining the necessary approvals, CCT plans to build a commercial building with c.1m square feet (sqft) of space in terms of gross floor area (GFA), equivalent to c.20% uplift in attributable net lettable area (NLA). Upon completion in 2021, the property will enhance CCT’s NAV and earnings.

Valuation

• We maintain our DCF-based TP of S$1.69. 
• With 10% capital upside and 5.9-6.1% yield, we maintain our BUY call.

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.

Melvin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-03-08

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.690 Same 1.690