CapitaLand Commercial Trust - RHB Invest 2017-04-20: Time To Lock In Profits

CapitaLand Commercial Trust - RHB Invest 2017-04-20: Time To Lock In Profits CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust - Time To Lock In Profits

  • CCT’s share price has surged by 10% YTD outperforming the FSSTI (+9%) and SGX S-REIT Index (+8%). 
  • We believe the recent run-up in its share price has factored in most of the positives arising from the potential redevelopment of GSCP, which has obtained PP from URA. 
  • Downgrade to TAKE PROFIT (from Buy). With its share price hovering close to our SGD1.68 TP (3% upside), we recommend investors to lock in profits and re-enter at lower levels. 
  • Potential near-term catalysts are the lower-than-expected DP charges and sale of assets at premium-to-book value.

Provisional permission (PP) obtained for Golden Shoe Car Park’s (GSCP) redevelopment. 

  • This redevelopment has cleared the first hurdle of obtaining PP from the Urban Redevelopment Authority (URA). 
  • CapitaLand Commercial Trust (CCT) is currently awaiting for the assessment of the differential premium (DP) payable to complete the feasibility study. We expect it to be completed in the next 1-2 quarters. 
  • With the existing tenants already notified, GSCP would cease operations on 31 Jul 2017. GSCP is likely to add ~1m sqf of commercial GFA in Singapore’s central business district (CBD) when fully redeveloped. Management is currently evaluating various funding options, which includes a potential sale of assets and JV structures to mitigate fund raising concerns. 

Office rental decline slowing down. 

  • Based on CB Richard Ellis’ (CBRE) 1Q17 data, rental for Grade A office buildings has declined at a slower pace of 1.6% QoQ vs 2.2% in 4Q16. Grade-A average office rents currently stands at 8.95 psf per month, down 22% from 1Q15’s peak. 
  • Pre-commitment levels for future supply remain relatively healthy based on CBRE data – Marina One (60% pre-leased) and UIC building (50% pre-leased). With office supply slowly tapering off post 2017, we expect rents to bottom out this year and start rebounding in 2018.

Convertible bonds likely to be exercised. 

  • About 80% of CCT’s borrowings are fixed, thus shielding the company from the risk of rising borrowing costs. It only has SGD175m of convertible bonds (coupon: 2.5% pa) due for refinancing in September. 
  • As the conversion price (SGD1.4265 ex-dividend) for convertible bonds is well below current share price levels, we expect at least a partial conversion into CCT shares. 
  • Our forecasts have already factored in the impact assuming full conversion into equity. A full conversion of convertible bonds would also lower gearing levels to 36.1% from 38.1%.

Downgrade to TAKE PROFIT

  • Downgrade to TAKE PROFIT with an unchanged TP of SG1.68, which reflects a COE of 7.8% and TG of 1.5%. 
  • We have not factored in any potential upside from the redevelopment of GSCP, which is pending feasibility studies. 
  • At current share price levels, CCT offers FY17F-18F yields of 5.6%.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-04-20
RHB Invest SGX Stock Analyst Report TAKE PROFIT Downgrade BUY 1.680 Same 1.680