CapitaLand Commercial Trust (CCT SP) - UOB Kay Hian 2017-09-22: Acquisition Of Asia Square Tower 2

CapitaLand Commercial Trust (CCT SP) - UOB Kay Hian 2017-09-22: Acquisition Of Asia Square Tower 2 CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust (CCT SP) - Acquisition Of Asia Square Tower 2

  • The proposed acquisition of Asia Square Tower 2 will extend CapitaLand Commercial Trust (CCT)’s footprint into the New Downtown and cement its position as the go-to landlord. 
  • While the acquisition is dilutive in the near term, it is expected to be yield-accretive in the future. The transacted price is attractive, with significant revaluation gain potential. We believe the transacted price is fair. 
  • Maintain BUY and target price of S$1.90.



WHAT’S NEW

  • CapitaLand Commercial Trust (CCT) announced the proposed S$2.15b acquisition of Asia Square Tower 2 office and retail (“AST2 Property”) via a 100% stake in an existing SPV.
  • The proposed acquisition is expected to be funded by a rights issue of S$690.4m (32.1%), bank borrowings of S$1,120m (52.1%) and divestment proceeds of S$340.1m (15.8%).
  • The fully underwritten rights will be issued at 166 units per 1,000 existing units at a 19.6% discount to the last closing price.


STOCK IMPACT


Acquisition cements CCT’s position as the go-to landlord. 

  • The transaction extends CCT’s footprint into the New Downtown (Marina Bay area), which it has no exposure currently. With this missing piece, CCT’s exposure to Grade A assets will increase from 62% to 69.9%. The transaction will also improve tenant diversification at the portfolio level (with contribution from top 10 tenants decreasing from 36.8% to 33.0%). 
  • At the same time, it will add two new tenants - Mizuho Bank and Mitsui Group – to its top 10. 
  • Finally, the addition of AST2 property will also improve asset diversification, such that the maximum NPI contribution by any single property will decrease from 27% to 23%.


Acquisition is dilutive in the near term but expected to be yield-accretive in the future. 

  • AST2 has an NPI yield of 3.6% and pro-forma DPU yields are estimated at 4.62% and 5.13% for FY16 and 1H17 respectively based on a debt cost of 2.5%. While this translates into a 13.8% dilution to FY16 pro-forma DPU yield, the dilution is reduced significantly to 4.6% in 1H17. 
  • With room to backfill the space (currently 88.7% committed occupancy) in a rising rental rate environment, the acquisition will likely be yield-accretive in the future.

Transacted price is attractive, with significant revaluation gain potential. 

  • CCT’s acquisition of premium Grade A office in AST2 at S$2,689psf of NLA is lower than the independent valuation of S$2,710psf and 7.8% below the mean of comparable Grade A properties. We believe the AST2 transaction is poised to see significant revaluation gain potential.
  • Acquisition cost of S$2,150.5m funded by a mix of rights issue, bank borrowings and divestment proceeds. The acquisition cost of S$2,150.5m will be funded by a mix of rights issue with net proceeds of S$690.4m (32.1%), bank borrowings of S$1,120m (52.1%) and divestment proceeds of S$340.1m (15.8%).

Room for further leverage. 

  • With the AST2 transaction, the pro forma aggregate leverage will be 37.1%, staying roughly the same as the current level of 36% (and still far below the regulatory limit of 45%). 
  • With a 2.5% cost of debt (below the 3.6% NPI yield), management could have increased leverage further to boost yield accretion. However, management has not done so so as to preserve its financial flexibility for use in the potential Golden Shoe development.


VALUATION/RECOMMENDATION

  • Maintain BUY and target price of S$1.90. 
  • We believe the near-term dilution is mitigated by future yield accretion. Our valuation is based on DDM (required rate of return: 6.7%, terminal growth: 2%). 


SHARE PRICE CATALYST

  • Higher-than-expected contribution from AST2 and Golden Shoe carpark redevelopment.
  • Higher office rentals, positive newsflow on leasing activity and employment growth.



CCT's presentation slides available at CapitaLand Commercial Trust Announcements
(Announcement dated 2017-09-21 16:37:12)




Vikrant Pandey UOB Kay Hian | Singapore Research UOB Kay Hian | http://research.uobkayhian.com/ 2017-09-22
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.900 Same 1.900



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