CapitaLand Commercial Trust - CIMB Research 2017-07-19: Room To Grow

Room To Grow - CIMB Research 2017-07-19: CapitaLand Commercial Trust CAPITALAND COMMERCIAL TRUST C61U.SI

Room To Grow - CapitaLand Commercial Trust

  • CCT's 1HFY17 DPU of 4.59 Scts made up 54% of our FY17F forecast, deemed in line.
  • Portfolio committed occupancy remains high at 97.6%.
  • Lease expiries are well paced with 15% of rental income to be re-contracted in FY18.
  • Recent asset sales provide more financial flexibility for new investment opportunities.
  • Maintain Hold; Target Price unchanged at S$1.68.

2Q17 DPU of 2.27 Scts, up 3.2% yoy 

  • CCT reported a 29.5%/34.3% yoy jump in 2QFY17 revenue and NPI, thanks to the inclusion of contributions from CapitaGreen
  • Distributable income rose 6.7% yoy to $69.5m while DPU improved a smaller 3.2% yoy to 2.27 Scts, with the inclusion of an additional 54.7m units from the convertible bond conversion. 
  • Book NAV was raised to S$1.77/unit on revaluation gains due to a 10-15bp compression in cap rates. 
  • 1HFY17 DPU of 4.59 Scts made up c.54% of our FY17F forecast, which we deem in line.

High portfolio occupancy, stable average portfolio rent 

  • Portfolio committed occupancy remained stable at 97.6% in 2Q17 while average portfolio rent was flat qoq at S$9.18psf even after 201,000 sq ft of new/renewal leases signed.
  • Demand was largely from banking, financial services, legal and education sectors.
  • Committed rents at 6 Battery Rd ranged from S$10.40-13.80psf (vs. expiring rents of S$12.37psf) and S$8.65-10.40psf (vs. expiring rents of S$9.71psf) at One George St.

Well-paced lease expiries 

  • CCT has remaining 3% of leases to be renewed in 2HFY17 and another 15% in FY18.
  • Average expiring rents are S$10.58psf for 2H17 and S$11.54psf for FY18. 
  • While we expect the office leasing market to start to bottom towards the latter part of this year, we believe there could still be some marginal negative rental reversion due to a high base.

Low gearing, divestments provide headroom for new investments 

  • CCT’s gearing declined to 36% as at end-2Q17, with a gross cash hoard of S$697m. The recent sale of Wilkie Edge should further expand its financial flexibility. 
  • Apart from funding its 45% equity stake in the Golden Shoe Carpark redevelopment project, it can also look to pare down debt, thus deepening its debt headroom for reinvesting into potential new acquisitions or value enhancing opportunities. Its debt maturity profile stands at 2.9 years and average funding cost is at 2.6%.

Retain Hold call 

  • We tweak our FY17F DPU slightly to include a potential payout from asset divestment gain in 2HFY17 to offset the income vacuum from asset sales and closure of GSCP for redevelopment. Our Target Price remains unchanged at S$1.68. 
  • CCT offers investors a potential FY18F dividend yield of 5.1%. While we like CCT for its exposure to the office cycle recovery and ability to renew the quality of its portfolio through AEIs, near-term upside appears limited. 
  • Downside risks: construction delays, lower-than-projected rental returns.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-07-19
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.680 Same 1.680