CapitaLand Commercial Trust - UOB Kay Hian 2018-01-26: 2017 Results Below Expectation

CapitaLand Commercial Trust - UOB Kay Hian 2018-01-26: 2017 Results Below Expectation CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust - 2017 Results Below Expectation

  • CapitaLand Commercial Trust CCT’s results were below expectations mainly due to lower-than-expected rent reversions and distribution from divestment gains. 
  • Management is looking to capitalise on the pickup in the office market. 
  • Maintain BUY; unchanged target price of S$2.09. 

CapitaLand Commercial Trust (CCT SP/ Rating: BUY/ Target Price:S$2.09)

Results below expectations; maintain BUY with a target price of S$2.09, based on DDM (required rate of return: 6.7%, terminal growth: 2.5%). 

  • CapitaLand Commercial Trust (CCT) reported a 4Q17 DPU of 2.08 S cents (+6.1% yoy), bringing 2017 DPU to 8.66 S cents (5.0% yoy). 
  • 4Q17 gross revenue and net income declined 3.8% and 4.0% yoy, due to the divestment of One George Street (50% interest) on 19 Jun 17, Golden Shoe Car Park on 12 Jul 17, and Wilkie Edge on 11 Sep 17, but these were offset by higher gross revenue and net property income from CapitaGreen and contribution from newly-acquired Asia Square Tower 2 on 1 Nov 17.
  • For 2017, gross revenue and net income increased 13.0% and 14.8% yoy, mainly due to contributions from CapitaGreen (full 12m in 2017 vs 4m in 2016) and AST2 (2m in 2017 from 1 Nov 17). 
  • The results were below our expectations, with 2017 DPU representing 94.7% of our full-year forecast below due to lower-than-expected rent reversions at Six Battery Road and One George Street and lower-than-expected distribution from the divestment gains.

Proactive capital management, with increased aggregate leverage to 37.3% in 4Q17 (3Q17: 33.9%). 

  • Total gross debt has ballooned to S$4.0b (3Q17: S$3.0b), due to more borrowings incurred during the quarter in relation to Asia Square Tower 2 (AST2). As part of its capital management efforts, CCT has obtained unsecured bank facilities of S$600m to refinance part of the S$1.12b in debt for the acquisition of AST2 (and the remainder will be re-financed when the right opportunity is presented). 
  • At the end of 4Q17, 80% of the borrowings were on fixed rates, providing certainty for interest expenses. The average term to maturity also stood at 2.4 years, while interest rates remained stable at 2.6% (3Q17: 2.7%) with interest coverage ratio at 4.9x.

Positive outlook for Singapore office rental growth. 

  • Singapore's core CBD and Grade A occupancy rates improved to 93.8% (vs 91.6% in 3Q17). The Grade A office rents rose by 3.3% yoy to S$9.40 psf pm in 4Q17, according to CBRE. 
  • Given the limited new supply in next few years (with less than 0.808msf p.a. from 2018-21) and high pre-commitment levels of completed and upcoming office CBD buildings, market rental growth looks sustainable going forward.

Rising market rents gives CCT opportunity to close gap between expiring and committed rents. 

  • Management noted that while lower net property income is expected in 2018 at some CCT properties (as expiring rents are higher than current market rent), CCT has the opportunity to leverage on the rising market rents to close the gap between signing and committed rents. Despite this, CCT has only 8% of total portfolio leases expiring for the rest of 2018. 
  • We can expect better results from the renewals to come in a more substantial way in 2019 and beyond, with more expiries on the way (2019: 31% of leases expiring).

Rise of regional centres unlikely to diminish the appeal of CCT’s CBD office stock. 

  • Despite the rise of regional centres (ie Jurong and Paya Lebar), management believes that take-ups there will not necessarily cannibalise CBD office stock. The attraction of locating in CBD is evergreen, not only for the quality spaces but also as part of the talent and attraction and retention (ie many tech companies have chosen set up in CBD areas).

The next leg of growth - Redevelopment of Golden Shoe Car Park (GSCP). 

  • Notwithstanding the rental recovery in Singapore office market, CCT’s 45% stake in GCSP is expected to create an additional income pipeline when completed in 1H21. The site has already completed demolition, and is preparing for ground breaking by early-Feb-18. 
  • CCT also has the call option to acquire the balance 55% interest not owned within five years from building’s completion, which can provide further upside.

Vikrant Pandey UOB Kay Hian | Loke Peihao UOB Kay Hian | http://research.uobkayhian.com/ 2018-01-26
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.090 Same 2.090