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
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http://www.rhbinvest.com.sg/
2017-07-20
RHB Invest
SGX Stock
Analyst Report
1.680
Same
1.680
