CapitaLand Commercial Trust - OCBC Investment 2018-01-26: Improving Rental Market

CapitaLand Commercial Trust - OCBC Investment 2018-01-26: Improving Rental Market CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust - Improving Rental Market

  • 4Q17 adjusted DPU +6.1% y-o-y
  • Full year contribution from AST2 in FY18
  • Trading above book value

4Q17 results within our expectations 

  • CapitaLand Commercial Trust (CCT) reported an in-line set of 4Q17 results. 
  • Gross revenue and NPI declined 3.8% and 4.0% YoY to S$86.3m and S$68.0m, respectively. This was attributed to the loss of income from divestments, but partially offset by higher contributions from CapitaGreen and Asia Square Tower 2 (AST2) which was acquired on 1 Nov 2017. 
  • DPU slumped 13.0% YoY to 2.08 S cents as a result of a rights issue exercise carried out for the acquisition of AST2. If we apply the same number of units outstanding to 4Q16 for comparison purposes, adjusted DPU would have increased 6.1% YoY. 
  • For FY17, CapitaLand Commercial Trust ’s NPI jumped 14.8% to S$265.5m and this constituted 102.9% of our forecast. DPU of 8.66 S cents represented a decline of 4.6% and came in close to our 8.62 S cents forecast. If we adjust for the rights issue as highlighted earlier, DPU for FY17 would have grown 5.0%.

Rentals likely to gain traction ahead 

  • CapitaLand Commercial Trust’s portfolio occupancy stood at 97.3%, slightly lower than the 98.5% registered as at end-3Q17. 
  • AST2’s occupancy was 90.5%, which leaves room for growth as we are confident that management will be able to ramp up the occupancy at the asset, with co-working operators a potential target segment. CapitaLand Commercial Trust’s asking rents are S$11.50-S$12.50 psf/month for the asset. 
  • In 4Q17, committed rents at Six Battery Road and One George Street were S$10.69-S$13.50 and S$9.00-S$10.60, versus average expired rents of S$12.77 and S$9.62, respectively. 
  • According to CBRE, core Grade A CBD office rents rose 3.3% QoQ to S$9.40 psf/month in 4Q17, gaining momentum following the 1.7% QoQ increase in 3Q17.

FY18F distribution yield of 4.7% based on closing price of S$1.90

  • We raise our FY18 and FY19 DPU forecasts by 2.5% and 2.8%, respectively, largely on lower finance costs assumptions. We also raise our terminal growth rate from 1.8% to 2.0% to take into account clearer indications of a recovery in the core Grade A CBD office rental market.
  • Rolling forward our valuations, our updated fair value estimate is S$1.84. Based on the last closing price of S$1.90, CCT is trading at FY18F distribution yield of 4.7% and P/B ratio of 1.1x.
  • Maintain HOLD.

Wong Teck Ching Andy OCBC Investment | http://www.ocbcresearch.com/ 2018-01-26
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 1.84 Up 1.660