CapitaLand Commercial Trust - RHB Invest 2017-10-23: A Decent Quarter But Overhang Remains

CapitaLand Commercial Trust - RHB Invest 2017-10-23: A Decent Quarter But Overhang Remains CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust - A Decent Quarter But Overhang Remains

  • CapitaLand Commercial Trust (CCT)’s 3Q results were in-line. 
  • While the overall portfolio occupancy inched-up, rent reversions remain negative due to high average expiring rents. The negative reversions are expected to continue in 2018 as the average expiring rents are still at a 20% premium to current market rents. 
  • While long-term drivers are in-place with the recent acquisition of AST2 and redevelopment of GSCP, near-term overhang persists from a convertible bond exercise and dilutive rights issue. 
  • Maintain our TAKE PROFIT recommendation with an unchanged TP of SGD 1.60 (4% downside).

Results Summary 

  • CapitaLand Commercial Trust (CCT)'s 3Q17 adjusted DPU were up by 7% YoY driven by higher contributions from CapitaGreen and a top-up of SGD3.3m from divestment gains. 3Q17 Revenue declined marginally by 0.4% YoY on the back of divestments. 
  • Operating expenses for the quarter declined by 10.4% YoY mainly due to lower property taxes resulting in a higher YoY NPI. The adjusted DPU for the 9M17 of SGD 0.0658 (6.58 cents) came in-line with our expectations, accounting for 74% of our full-year forecasts.

Key Highlights 

Portfolio occupancy inches up to 98.5%... 

  • the occupancy improvement was driven by a higher occupancy at Six Battery Road, Raffles City and Twenty Anson. In 3Q17, CapitaLand Commercial Trust (CCT) signed up approximately 170,000 sqf (2Q17: 201,000 sqf) of leases, with 30% being new leases. 
  • The key sectors driving demand were banking, financial services, energy, commodities, maritime and logistics sectors. 
  • CCT has completed most of the 2017 renewals and it has about 12% of leases (as percent of rental income) due in 2018.

... while rent reversions continue to remain negative. 

  • Negative reversions were mainly due to high average expiring rents which were signed during the peak years for office space in 2013-2014. While we expect Grade-A office rents to rebound by 5-10% in 2018, CCT is expected to see continued negative reversions as expiring rents of SGD11.14 psf (2018 average) are still c.20% above current market rents.

Convertible bonds fully exercised. 

  • All of SGD175m convertible bonds due 12 Sep 2017 have been converted into equity, at an exercise price of SGD1.4265. This has resulted in new equity issuance of 122.5m shares (c.4% of total shares). 
  • With the share price currently trading at a hefty c.17% premium, CCT may see some near-term selling pressure from the exercise of conversion rights.

Banking on Asia Square and GSCP Transformation. 

  • During 3Q17, CCT announced the acquisition of a 100% stake in Asia Square Tower 2 (AST2) for SGD2.1bn or SGD2,689 psf. The acquisition funded partly by a SGD700m rights issue is slightly dilutive in the near-term, but it can add value over long-term if CCT manages to ride on the office market recovery. 
  • Additionally, CCT also announced an SGD1.82bn for the redevelopment of Golden Shoe Car park (45% stake), expected to be completed by 1H21.

Maintain TAKE PROFIT and an unchanged Target Price of SGD1.60. 

  • Our DDM-derived TP is based on a COE of 7.4% (Rf: 2.75% and TG: 1.5%). In our model, we have factored in a capital distribution of SGD5m for FY17F and SGD10m for FY18F-19F from the divestment gains. 
  • The stock currently trades at a 0.9x P/BV and offers FY17F-18F yields of 5.3%-5.2% respectively.

Vijay Natarajan RHB Invest | 2017-10-23
RHB Invest SGX Stock Analyst Report TAKE PROFIT Maintain TAKE PROFIT 1.600 Same 1.600