CapitaLand Commercial Trust (CCT SP) - Maybank Kim Eng 2017-12-15: Positives Priced-In

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CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust (CCT SP) - Positives Priced-In

D/G to HOLD; Awaiting better entry point 

• While CapitaLand Commercial Trust (CCT) is an excellent proxy to the recovering office market, we believe the positives are priced in after a stellar 40% total return over the past year. 
• Management manoeuvred nicely in 2017 by unlocking value in two fully-priced assets and redeploying the capital into the redevelopment of the GSCP and AST2 acquisitions. We believe the market will watch CCT’s ability to improve the underlying performance of AST2 in 2018. 
• Upside catalysts to watch are stronger than expected occupancies and signing rents. We raise FY18/19E DPS by 2.0%/2.7% to reflect higher market rent forecasts. 
• Our TP is lifted 2% to SGD1.80 based on an unchanged target yield of 5.0%, to reflect our relative preference within the sector. This is close to its historical low and reflects our view of a potential rebound in the office market. 
• Downgrade to HOLD from BUY.

Negative reversion for at least one more year 

• With vacancies still high and plenty of secondary space surfacing in the year ahead, we doubt market rents can rally enough to clear 2015 levels next year. This implies rental reversions will stay negative in 2018 considering the typical lease tenure of three years. As such, we expect underlying income to remain under pressure.

Nice manoeuvres in 2017; Time for 2018 execution 

• 2017 was an eventful year for the management of CapitaLand Commercial Trust. They sold two assets (50% in One George Street + Wilkie Edge) at large premiums to fund the redevelopment of Golden Shoe Carpark (GSCP), and negotiated hard to acquire Asia Square Tower 2 (AST2) at an attractive price. It is execution time in 2018. 
• We expect the market to focus on occupancy and signing rents at AST2 to determine the outlook for the stock.

GSCP a medium-term story 

• Looking beyond the near-term, the ongoing redevelopment of GSCP has the potential to deliver outsized returns for unitholders. 
• Our surplus estimates of 2.4 SGD cts (post-rights) are premised on Grade A rents reaching SGD11 psf by 2021E. While it is still too early to start its pre-leasing, a faster-than-expected rent increase could pose upside risk to our estimates.

Swing Factors

Upside

• Appreciation in the capital value of its properties.
• Successful redevelopment of assets, such as Golden Shoe Carpark.
• Earlier-than-expected rebound in office rents.

Downside

• Sharper-than-expected declines in office rents or occupancies.
• Overpaying for acquisitions.
• Cost overruns in any redevelopment projects.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-12-15

Maybank Kim Eng SGX Stock Analyst Report HOLD Downgrade BUY 1.80 Up 1.770