CapitaLand Commercial Trust - CIMB Research 2017-07-13: Working Assets Harder

CapitaLand Commercial Trust - CIMB Research 2017-07-13: Working Assets Harder CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust - Working Assets Harder

  • Redeveloping Golden Shoe Carpark into a mixed integrated project.
  • Deal is positive, enables CCT to tap growth opportunities and build up acquisition pipeline.
  • CCT’s 45% investment share works out to S$819m, to be funded partly through asset divestment proceeds.
  • Post development gearing of 35%, well within the trust’s optimal level.
  • Maintain Hold, Target Price raised to S$1.68.

Details of the GSCP redevelopment 

  • CCT has confirmed it will be redeveloping Golden Shoe Carpark (GSCP) at Raffles Place into a 51-storey integrated project with offices, serviced residence (299 units), ancillary retail units and a food centre, via a JV with Capitaland (45%), CCT (45%) and Mitsubishi Estates Co Ltd (MEC) (10%). (see CapitaLand Commercial Trust announcement dated 2017-07-13: Joint venture with CapitaLand and Mitsubishi Estate Co., Ltd. to redevelop Golden Shoe Car Park)
  • We are positive on this exercise as it would enable CCT to leverage on growth opportunities while building a potential acquisition pipeline.

Total estimated cost of S$1.82bn 

  • An estimated 80% of the total 1.005m sq ft of GFA will be allocated for office use (635,000 sq ft NLA), followed by serviced residence (14%), ancillary retail (2%, 12,000 sq ft NLA) and food centre (4%). Total estimated development cost is S$1.82bn, including S$958m of differential premium. 
  • On completion in 1H2021, the food centre will be handed back to the Ministry of Environment and Water Resources. Ascott will manage the serviced residences.

Remaining 55% stake forms a potential acquisition pipeline 

  • The target yield on cost is estimated at c.5%. In addition, CCT has a call option for the commercial component from Capitaland and MEC as well as a drag-along right over MEC’s serviced apartment component within five years after completion. This allows CCT to purchase the remaining 55% share at market value, subject to a base price calculated using total development cost less any net property income, compounded at 6.3% (commercial) and 5% (serviced residence) p.a.

Gearing expected to be at 35% post development 

  • CCT’s 45% share of the total development cost works out to S$819m, making up 9% of its revalued AUM, well within the required 10% development limit. We expect post-development gearing to be c.35%. 
  • It plans to fund the project using a 40/60 equity/debt structure. The equity portion of S$328m can be funded by the S$872m of cash proceeds from the sale of 50% of One George St and Wilkie Edge. 
  • Also, the excess cash would likely enable CCT to evaluate potential new acquisitions when opportunities arise.

Maintain Hold 

  • We lower our FY17-19F DPU by 4.1-4.6% to impute the income loss from two earlier asset sales and include the potential uplift from GSCP from 2021 onwards. 
  • We also adjust our assumed SG risk free rate to 2.5% (from 2.8%) due to the flattening of the yield curve. Hence, our DDM-based Target Price rises to S$1.68. 
  • CCT is trading at c.5.2% FY18F yield, midway between mean and +1 s.d. We believe some of the GSCP redevelopment prospects have been priced in. 
  • Key risks: construction delays, lower than projected rents.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | 2017-07-13
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.68 Up 1.550