CapitaLand Commercial Trust - OCBC Investment 2017-09-26: Quality Asset Acquisition, But At A Dilution

CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust - Quality Asset Acquisition, But At A Dilution

CapitaLand Commercial Trust (CCT) recently proposed to acquire Asia Square Tower 2 which excludes the hotel component (AST2) from BlackRock. The agreed property value of S$2,094m translates into S$2,689 psf on NLA and is expected to contribute an initial NPI yield of 3.6%. This is based on a committed occupancy rate of 88.7%, as at 30 Jun 2017.
We see potential upside to this NPI yield as we are confident that management would be able to ramp up the occupancy rate of the property amid a recovering office market.

This acquisition yield also compares favourably to the exit NPI yield achieved by CCT for One George Street (3.2%) and Wilkie Edge (3.4%).
S$340.1m of the divestment proceeds will be used to partially finance this acquisition (total cost of ~S$2,150.5m), with the remainder to be funded by bank borrowings (S$1,120m) and a rights issue (166 units for every 1,000 existing rights units) to raise net proceeds of S$690.4m.
The rights issue price of S$1.363 comes in at a 17.3% and 19.6% discount to the theoretical exrights price of S$1.648 and last closing price of S$1.695 before the announcement, respectively.
We note that AST2 will provide CCT with a number of benefits such as the addition of a premium Grade A property with efficient floor plates at a strategic location at the heart of the Marina Bay area, diversification of tenant base and reasonable agreed property value vis-à-vis comparable Grade A office assets. However, there would be an initial dilution to CCT’s DPU due to the rights issue.

On a pro forma basis, CCT’s aggregate leverage would be ~37.1%. Despite the dilution, we see room for management to boost its DPU once it ramps up occupancy at AST2, coupled with the potential to benefit from an uplift in market spot rents in FY18.
Besides factoring in this transaction in our model, we also recalibrate our assumptions (cost of equity: 6.9%; terminal growth: 1.8%) following a change in analyst coverage.
Our FY17 and FY18 DPU forecasts are adjusted by -9.1% and -9.2%, respectively. We maintain our HOLD rating but with a lower fair value estimate of S$1.65 (previously S$1.69).

Wong Teck Ching Andy OCBC Investment | http://www.ocbcresearch.com/ 2017-09-26

OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 1.650 Down 1.690