CapitaLand Commercial Trust - RHB Invest 2017-07-04: Divestment Of Wilkie Edge

CapitaLand Commercial Trust - RHB Invest 2017-07-04: Divestment Of Wilkie Edge CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust - Divestment Of Wilkie Edge

  • Although CapitaLand Commercial Trust (CCT)’s proposed divestment of its integrated development, Wilkie Edge is at a hefty premium to book value, concerns remain as to how management plans to offset the DPU shortfall arising from its recent divestments. 
  • With a strengthened balance sheet, we believe CCT could potentially acquire a minority stake in Asia Square Tower 2 along with CapitaLand, which, based on a media report, is in exclusive negotiations to acquire the property. However, the critical factors to watch out for include the potential acquisition price and whether the acquisition would be yield accretive. 
  • We also expect some near-term overhang from the conversion of convertible bonds to equity, with the share price currently trading at ~17% premium to the conversion price. 
  • Amid these uncertainties, we maintain our TAKE PROFIT recommendation on the stock.
  • Our Target Price of SGD1.68 is unchanged for now, pending a discussion with management.

What’s New? 

  • CapitaLand Commercial Trust (CCT) announced the proposed sale of its 12-storey integrated development, Wilkie Edge to Lian Beng (8) Pte Ltd for SGD280m or SGD1,812psf of NLA. The selling price is 39.3% above its latest valuation of SGD201m (as at end-Dec 2016) and 53.3% higher than the original purchase price (2008). 
  • Wilkie Edge had a committed occupancy of 99.9% as at 31 Mar 2017, and accounted for 3% CCT’s net property income in 1Q17. The sale is expected to be completed by Sep 2017.

Our View 

Divestment at a good price. 

  • We believe the exit NPI yield of 3.39% pa is fair and reflects the positive outlook for office rents with supply expected to bottom out by end-2017. 
  • Upon completion of the sale, CCT is expected to book a net gain of SGD76m or a 3 cents accretion to its current NAV/unit of SGD1.73. 
  • The proposed divestment of Wilkie Edge comes closely on the heels of CCT’s sale of a 50% stake in One George Street (completed in Jun 2017) to FWD Group for SGD591.6m, or an exit NPI yield (12-mth trailing) of 3.2%.

Building war chest for potential acquisitions? 

  • With recent divestments and assuming a full conversion of convertible bonds (SGD175m due by Sep 2017, of which SGD51.8m has been converted YTD), CCT is expected to raise total gross proceeds of ~SGD1.05bn. This is expected to lower CCT’s gearing to ~30% from 38.1% in 1Q17. Assuming a comfortable gearing level of 40% would give CCT a potential headroom of > SGD1.25bn.
  • We expect part of the proceeds to be used for the funding of the potential redevelopment of Golden Shoe Car Park (GSCP), which is pending final assessments and feasibility study. 
  • We also expect CCT to be on the lookout for potential acquisitions to offset some of the DPU shortfall. One potential possibility may be CCT acquiring a minority stake in Asia Square Tower 2 along with CapitaLand (CAPL SP, Rating: NEUTRAL, Target Price: SGD3.84), which, based on a recent media report, is in exclusive talks with the vendor.

Bridging the DPU gap remains a concern. 

  • We have not imputed the impact of recent divestments in our model, which are expected to negatively impact our FY18F/19F DPU by 5-8%. We maintain our estimates for now pending a discussion with management.
  • Amid the above uncertainties, we maintain our TAKE PROFIT recommendation. Our DDM-derived Target Price of SGD1.68 (COE of 7.8% and TG of 1.5%) is unchanged for now.

Vijay Natarajan RHB Invest | 2017-07-04
RHB Invest SGX Stock Analyst Report TAKE PROFIT Maintain TAKE PROFIT 1.68 Same 1.680