CapitaLand Commercial Trust - CIMB Research 2018-04-25: Boost From Acquisition Growth

CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust (CCT) - Boost From Acquisition Growth

CapitaLand Commercial Trust's 1Q18 DPU of 2.12 Scts was expected, making up 24% of our FY18F forecast.
Still experiencing slight negative reversions, demand from diverse trade sectors.
Rental gap is narrowing as office spot rents trend up.
Returning Bugis Village to the State from 1 Apr 2019.

CapitaLand Commercial Trust (CCT) reported a 7.7% rise in 1Q18 revenue to S$96.4m while distribution income rose 7.5% to S$76.6m. This was due to the inclusion of Asia Square T2 contribution and higher income from CapitaGreen, Capital Tower and 6 Battery Rd.
1Q18 DPU of 2.12 Scts was lower y-o-y due to a rights issue earlier. On an adjusted-for-rights basis, DPU would have risen 7.6% y-o-y.
Committed portfolio occupancy remained high at 97.3%, unchanged q-o-q.

In 1Q18, CCT leased/renewed 96,000 sq ft of retail and office space, mainly at 6 Battery Rd and One George St. About 37% of these transactions were new leases. Demand came largely from financial services, services, business consultancy, energy, commodities, hospitality and F&B trade sectors.
However, even as the rental gap narrowed, there was still negative rental reversion and average portfolio office rents slipped 0.4% y-o-y to S$9.70psf.

CCT has 6% of office and retail space expiring in 9M18 and 31% due to be renewed in 2019. Part of the office renewal for 2019 has been extended to 2021 with JP Morgan committing 155,000 sq ft at CapitaSpring ahead of completion in 1H21 while another 6% is under advanced negotiations.
Average expiring office rents for 9M18 and 2019 range between S$10.82 and S$10.37psf. We think there could still be some marginal negative reversions but the gap should continue to narrow on the back of office upcycle.

CCT indicated that it has received confirmation from the Singapore authorities that they will take back Bugis Village on 1 Apr 2019. CCT will receive compensation based on the amount of S$6.6m plus accrued interest compounded from 1989.
Management has not indicated the actual quantum to be received.
Bugis Village is valued at S$44m and accounted for 0.4% of Dec 17 AUM and contributed 2.2% of 1Q18 NPI.

CCT’s cost of debt ticked up slightly q-o-q to 2.7% (vs. 2.6% at end-FY17) while gearing inched up to 37.9%. With recent refinancing activities, CCT does not have any more loans due in 2018. About 90% of its borrowings are on fixed rates.
The trust indicated that for a 0.5% rise in interest cost, its DPU could be impacted by 0.1 Scts or 1.2% of annualised 1Q18 DPU.

We leave our FY18-20F DPU estimates unchanged post results and pending further details on the Bugis Village development.
While we like the trust for its pure Singapore exposure into the office cycle recovery and ability to rejuvenate portfolio through AEIs and redevelopment activities, near-term upside remains limited.
Our DDM-based Target Price of S$1.93 is unchanged.
Upside risk is faster than projected office rental recovery.
Downside risk is slower economic growth which could dampen appetite for office space.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2018-04-25

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