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.

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.

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.

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 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