CapitaLand Commercial Trust (CCT SP) - UOB Kay Hian 2018-04-25: 1Q18 Eyeing Overseas Expansion

CapitaLand Commercial Trust (CCT SP) - UOB Kay Hian 2018-04-25: 1q18 Eyeing Overseas Expansion CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust (CCT SP) - 1q18 Eyeing Overseas Expansion

  • CapitaLand Commercial Trust (CCT)’S 1Q18 results are in line as it rides on improving office sentiment in Singapore. There is more upside ahead for CCT when CapitaSpring comes on stream (already secured J.P. Morgan as anchor tenant) amid favourable demand-supply dynamics in the Singapore office space.
  • Management guided on CCT’s acquisition opportunities in both Singapore and abroad, leveraging on the sponsor’s platform.
  • Maintain BUY with an unchanged target price of S$2.09.



RESULTS


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

  • CCT reported a 1Q18 distributable income of S$76.6m (+7.5% y-o-y) and a DPU of 2.12 S cents, (-11.7% y-o-y). The results were in line with expectations, with 1Q18 DPU representing 23.9% of our full- year forecast.
  • 1Q18 gross revenue and NPI were up by 7.7% y-o-y and 10.5% y-o-y respectively, arising from higher gross revenue and net property income from most of the properties, as well as contributions from AST2, but partially offset by absence of income due to divestments of One George Street, Golden Shoe Car Park and Wilkie Edge. Distributable income rose 7.5%, due to higher distributions from JVs. CCT has retained S$1.6m of income in 1Q18 (vs 1Q17: S$22.5m).

CapitaSpring secures J.P. Morgan as anchor (committing close to 25% of the NLA).

  • CCT has retained J.P. Morgan as a key tenant in its portfolio, extending its lease at Capital Tower and securing its relocation to CapitaSpring after the development’s completion (scheduled for 1H21). We believe the successful retention of J.P. Morgan reflects demand among progressive companies for a prestigious address (in CBD) with modern future-ready facilities.
  • Occupancy stabilised at 97.3% (+0ppt q-o-q), which is still above the market cupancy of 94.1%.


STOCK IMPACT

  • Longer debt maturities and higher proportion of fixed-rate financing. In the face of an impending rate hike, management refinanced the bridge loans raised to finance AST2 with bank loans and bonds with varying maturities between four to seven years, extending the debt portfolio average term maturity to 3.9 years (vs 2.4 years in 4Q17). The proportion of financing on fixed rate also grew to 90% (vs 80% in 4Q17). Management also guided that the weighted average cost of debt which crept up to 2.7% (vs 2.6% in 4Q17) will rise further in view of higher interest costs to be incurred for the S$1.1b borrowings (secured to refinance AST2 borrowings).
  • Committed rents are signed higher than expiring, with reversions at AST2 ranging from -6.5% to 18% (committed rents vs average expired rentals), Six Battery Road’s reversions ranging from -1.8% to 6.4%, and One George Street’s reversions ranging from 0% to 20%.
  • Rising office rents in Singapore. According to CBRE data, Grade A monthly office market rent increased (3.2% q-o-q, 8.4% y-o-y) to S$9.70 psf in 1Q18. Management guided that with higher committed occupancies in newly-completed office buildings and limited new supply in the CBD from 2018-20, market rents are expected to continue growing over the next few years. CCT will benefit from the higher rent renewals later than sooner, with 5% expiring leases uncompleted in 2018 (vs 31% in 2019).
  • Bugis Village (accounts for 2.2% of 1Q18 NPI) to be returned to the State in Apr 19. The property has 121,000 sf in NLA, enjoys 100% occupancy and was valued at S$44m as at 31 Dec 17. Upon the return, CCT expects to receive a compensation sum based on S$6.6m and accured interest compounded from 1989.
  • Acquisition opportunities in Singapore and abroad. In Singapore, CCT still has the call option to acquire the balance 55% interest in the commercial component of CapitaSpring, within five years from the building’s construction. While remaining Singapore-focused, investment opportunities may be limited as good assets are tightly held and keenly sought after in Singapore. Management has set sight on acquiring core assets in selected global gateway cities across development markets (to make up 10-20% of total deposited properties), by leveraging on the sponsor’s overseas platform.


VALUATION/ RECOMMENDATION

  • Maintain BUY with an unchanged target of S$2.09. 
  • Our valuation is based on DDM (required rate of return: 6.7%, terminal growth: 2.5%).


SHARE PRICE CATALYST

  • Higher-than-expected signing rentals and occupancies at CapitaSpring.
  • Higher office rentals, positive newsflow on leasing activity, employment economic growth.





Vikrant Pandey UOB Kay Hian | Peihao Loke UOB Kay Hian | http://research.uobkayhian.com/ 2018-04-25
SGX Stock Analyst Report BUY Maintain BUY 2.090 Same 2.090



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