CapitaLand Commercial Trust - CIMB Research 2018-01-25: Boost From CapitaGreen And Asia Square Tower 2

CapitaLand Commercial Trust - CIMB Research 2018-01-25: Boost From CapitaGreen And AST2 CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust - Boost From CapitaGreen And AST2

  • CapitaLand Commercial Trust's 4Q/FY17 adjusted DPU of 2.08 Scts/8.66 Scts was slightly above our projections but in line with consensus.
  • More tenant retention in 4Q kept portfolio occupancy high.
  • Expect narrowing rental gap with office market recovery in FY18.
  • Maintain HOLD with a higher Target Price of S$1.93.

4Q17 results highlights 

  • CapitaLand Commercial Trust’s 4Q17 gross revenue fell 3.8% y-o-y due to the loss of income from the sale of 50% of One George St, Golden Shoe Carpark (GSCP) and Wilkie Edge. This was partly mitigated by 2 months of contribution from Asia Square Tower 2 (AST2) and income from CapitaGreen. 
  • Inclusive of S$9.1m of capital top-up and tax-exempt income, adjusted 4Q DPU of 2.08 Scts rose 6.1% y-o-y and made up c.26% of our FY17 projections. 
  • For FY17, adjusted DPU of 8.66 Scts increased by 6% y-o-y and was 7% above our projections.

High portfolio occupancy, more tenant retention 

  • CapitaLand Commercial Trust renewed 666,000 sq ft of retail and office leases in FY17 (182,000 sq ft in Q4), with a 78% retention rate, keeping portfolio committed occupancy at a high 97.3%. 
  • An estimated 38% of the leases were new signings coming from financial services, commodities, maritime and logistics. There were still negative reversions even as the range of committed rents trended higher q-o-q.

Expect rental gap to narrow on the back of office market recovery 

  • CapitaLand Commercial Trust’s 9% of office and retail rents will expire in FY18 and another 30% in FY19. Management guided that there could still be some negative renewals as the expiring rents in FY18 at some properties are still higher than current market rents. 
  • Nonetheless, we believe as office spot rents trend up on the back of demand recovery and limited supply, the reversion gap should narrow.

FY18 earnings to be boosted by full-year contribution from Asia Square Tower 2 

  • Nevertheless, we project FY18 DPU to rise 2.1% y-o-y to 8.85 Scts on the back of a full-year contribution from Asia Square Tower 2 (vs. 2 months in FY17). Current committed occupancy at AST2 is at 90.5% compared to the take-up of 88.7% at the point of acquisition. 
  • CapitaLand Commercial Trust’s gearing rose to 37.3% at end-FY17 with additional debt funding taken for Asia Square Tower 2 purchase while cost of debt averaged 2.6%. It had recently obtained S$600m unsecured bank loans to refinance part of the S$1.12bn loans due in 2019.

Maintain HOLD 

  • We have raised our FY18-19F DPU post results. CapitaLand Commercial Trust is currently trading at FY18F DPU yield of 4.6%. 
  • While we like the trust for its pure exposure to the office cycle recovery and ability to rejuvenate its portfolio through AEIs and redevelopment activities, near-term upside remains limited. 
  • Maintain HOLD with a higher DDM-based Target Price of S$1.93. 
  • Upside risks include faster-than-expected office rental recovery and downside risks include slower appetite for office space.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | 2018-01-25
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.93 Up 1.680