CapitaLand Commercial Trust - CIMB Research 2017-10-20: Better Cost Management And Top-ups Lift 3Q DPU

CapitaLand Commercial Trust - CIMB Research 2017-10-20: Better Cost Management And Top-ups Lift 3Q DPU CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust - Better Cost Management And Top-ups Lift 3Q DPU

  • CapitaLand Commercial Trust (CCT)'s 9M17 DPU of 6.92 Scts made up 80% of our FY17 forecast, broadly in line.
  • It still experienced negative rental reversions in 3Q.
  • Uptick in office leasing market should narrow negative reversion gap going forward.
  • New contributions from AST2 to be felt from 4Q17.
  • Maintain Hold with TP of S$1.68.

3Q17 results within expectations 

  • CCT reported a 0.4% dip in gross revenue to S$74.1m. Distribution income improved 7% yoy to S$73.1m thanks to better cost savings (NPI margin 79% vs. 76.6% in 3Q16) and a S$3.3m distribution of divestment gains. This translates to a DPU of 2.36 Scts (or 2.02 Scts on a rights adjusted basis). 
  • For 9M17, 6.92 Scts DPU (6.58 Scts rights adjusted) accounted for 80% of our FY17F forecast, broadly in line with expectations.

Still impacted by negative reversions 

  • CCT renewed/leased 170,000 sq ft of space in 3Q, of which 30% were new leases. New demand came from tenants in the financial services, business consultancy, IT, TMT, energy, commodities, maritime and logistics sectors. 
  • In terms of renewals, management indicated that reversion rents are still negative, although higher than current market rates. Committed portfolio occupancy remained at a high 98.5% as at end-3Q.

Expect rental gap to narrow with office rental market recovery 

  • Looking ahead, CCT has a marginal 1% of rental income to be renewed for the remainder of FY17 and another 13% and 32% of office and retail leases to be re- contracted in FY18 and FY19. 
  • With the current recovery in the office leasing market, we anticipate a pick-up in spot office rents. Hence, we believe the spread between market and expiring rents should narrow over time.

Maiden contributions from AST2 from 4Q 

  • CCT’s 4QFY17 earnings are also expected to benefit from maiden contributions from the recently acquired Asia Square Tower 2 (AST2). The 779,000 sq ft premium office tower was purchased for S$2.1bn or at 3.6% yield (based on occupancy of 88.7%). The acquisition was funded by S$690m rights issue and S$1.46bn of bank borrowings and divestment proceeds. 
  • Although DPU is diluted in the near term, we remain positive on the deal as this provides CCT with a Grade A asset to ride the office rental recovery.

Maintain Hold 

  • We have lowered our FY17-19 DPU to factor in the dilution from the rights issue to fund the AST2 acquisition. CCT offers investors an FY18F DPU yield of 5.1%. 
  • While we like the trust for its pure exposure to the office recovery cycle and ability to rejuvenate its portfolio through AEIs and redevelopment activities such as Golden Shoe Carpark, near- term upside appears limited. 
  • Maintain Hold with a DDM-based TP of S$1.68. 
  • Downside risks: construction delays or lower-than-projected rental returns.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | 2017-10-20
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