CapitaLand Commercial Trust - RHB Invest 2017-07-20: Positives Priced In

CapitaLand Commercial Trust - RHB Invest 2017-07-20: Positives Priced In CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust - Positives Priced In

  • CapitaLand Commercial Trust (CCT)’s 2Q results came in line. Despite office market showing signs of bottoming, we expect portfolio negative rent reversions to persist due to high average expiring rents. 
  • While we support CCT’s recent divestment moves we would be closely watching out for how the proceeds are redeployed. 
  • We also expect some near-term overhang from the conversion of convertible bonds to equity, with the share price of CCT currently trading at a hefty 19% premium to conversion price. 
  • Amid these uncertainties we keep our TAKE PROFIT recommendation.

Negative rent reversions likely to persist despite market bottoming. 

  • In 2Q17, CapitaLand Commercial Trust (CCT) recorded slight negative rent reversions in Six Battery Road and One George Street as expiring leases were signed during office market peak. 
  • Looking ahead, CCT has about 2%/15% of leases expiring in 2H17F/FY18F with an average expiring rents of SGD10.58psf and SGD11.45psf (80% of expiring leases). As expiring rents are still above current Grade-A average rents (CBRE) of SGD8.95psf we expect negative rent reversions to persist for a few quarters.

Active divestments amid office cap rate compression in Singapore. 

  • Since the start of the year, CCT has divested its stake in three of its assets. While we support the move as the assets were divested at hefty premiums (10%-39%) to book value, we would be closely watching for management’s plans on recycling the capital. CCT guided that some of the gains would be used temporarily to offset a DPU shortfall. 
  • Overall, CCT would reap net divestment proceeds of SGD921m and book a net gain of SGD172m.

Golden Shoe Car Park (GSCP) redevelopment a long-term positive. 

  • CCT (45% stake) and its JV partners CapitaLand (45% stake) and Mitsubishi Estate Co., Ltd. (10%) announced redevelopment plans for GSCP at an estimated cost of SGD1.82bn. The targeted yields of c.5% p.a. are reasonably attractive under current market conditions and are achievable in our view. 
  • Post transaction, gearing is expected to remain modest at c.33% providing headroom of c.SGD1bn (assuming comfortable gearing of 40%) for more acquisitions. 
  • We expect management to remain active in the acquisition space and potentially acquire a minority stake in Asia Square Tower-2 along with CapitaLand who, based on a media article, is in exclusive negotiations with vendor.

Conversion of convertible bonds a near-term overhang. 

  • An amount of c.SGD130m of SGD175m convertible bonds due September 2017 has been converted into equity and we expect the remaining to also be converted. 
  • As CCT's share price is currently trading at a hefty c.19% premium to conversion price, we expect some selling pressure from the exercise of conversion rights.

Maintain TAKE PROFIT and unchanged TP of SGD1.68. 

  • We adjust our earnings to take into account recent divestments; we have also factored in a capital distribution of SGD10m for FY17F and SGD20m for FY18-19F to mitigate DPU losses from divestments. 
  • Post revisions, our FY17-19F DPU is down slightly by 0-1%
  • Our DDM-derived Target Price of S$1.68 is based on a COE of 7.4% (Rf: 2.75% and TG: 1.5%). 
  • The stock offers FY17F-18F yields of 5.4%.

Vijay Natarajan RHB Invest | 2017-07-20
RHB Invest SGX Stock Analyst Report TAKE PROFIT Maintain TAKE PROFIT 1.680 Same 1.680