CapitaLand Commercial Trust - RHB Invest 2018-01-26: Positives Already In Share Price

CapitaLand Commercial Trust - RHB Invest 2018-01-26: Positives Already In Share Price CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust - Positives Already In Share Price

  • While outlook for the office sector is getting rosier, the positive effects are likely to flow into CapitaLand Commercial Trust (CCT)’s DPU only after 2020. This is mainly due to the expected near-term negative rent reversions stemming from high expiring rents for its leases. 
  • Key re-rating catalysts are the successful repositioning of AST2 and redevelopment of GSCP. Post recent surge in CCT's share price, valuations look stretched with FY18F yields and P/BV ratio closer to its 10-year peak. Thus, we believe that the positives are fully priced in. 
  • Downgrade to SELL (from Take Profit), with a revised Target Price of SGD1.63 (from SGD1.60, 14% downside).

Slightly less optimistic than consensus on office rent growth. 

  • While we expect office rents to rebound by 5-10% for 2018, we believe that consensus are looking at more than 10% rent increase for this year. 
  • We also note that while Grade A office rents have picked up by 5% (based on CBRE data) over last two quarters, vacancy rates (Grade A) remain on the high side at 6.2% (5- year average – 5.4%). We believe this is mainly due to the indigestion from a huge influx of supply last year and flight to quality from tenants in the older Grade A office buildings, which could cap rent growth.

Expecting marginal negative rent reversions for 2018. 

  • This is mainly due to the high average expiring portfolio rents at SGD11.09 psf/month, compared to current average Grade A market rent of SGD9.40 psf/month. 
  • While management has expressed confidence in closing this gap, we expect at least three of the six expiring property leases (Six Battery Road, CapitaGreen and Asia Square Tower 2 (AST2)) to see negative reversions. 
  • 2019’s outlook looks brighter with average expiring rents at a palatable SGD10.44 psf/month.

Occupancy boost at AST2 could be the wild card. 

  • Occupancy at CapitaLand Commercial Trust’s (CCT) recently acquired AST2 currently stands at 90.5%, well below its portfolio average of 98%. 
  • While there is room for upside potential from AST2, we note that vacancy in neighbouring Asia Square Tower 1 (AST1) is expected to rise in the latter part of the year from planned tenant movements. This could put some pressure on AST2. We have currently assumed a flat 90% occupancy for AST2 in FY18.

Redevelopment of Golden Shoe Car Park (GSCP) – a long-term positive.

  • The building is on-track to be completed in 1H21. CCT currently has a 45% stake in the redevelopment and a call option to buy the remaining 55% stake within five years after completion. 
  • It has so far paid SGD537.8m for the development, with a balance of SGD 281.2m, to be paid progressively upon completion progress. This progress payments would result in a slightly higher interest expenses for the company.

Downgrade to SELL, with a slightly higher SGD1.63 TP. 

  • We have tweaked our FY18-19F DPU by 0-1%. We also lower our COE assumptions in our DDM model by 50 bps to 6.9% (Rf: 2.75% and TG:1.5%). 
  • The stock currently offers FY18F-19F yields of 4.5%. 
  • Key risks to our call is a stronger-than-expected surge in office demand and continued fund flows into yield instruments.

Vijay Natarajan RHB Invest | 2018-01-26
RHB Invest SGX Stock Analyst Report SELL Downgrade TAKE PROFIT 1.63 Up 1.600