CapitaLand Commercial Trust - Maybank Kim Eng 2018-05-17: Maiden Overseas Foray

CapitaLand Commercial Trust - Maybank Kim Eng 2018-05-17: Maiden Overseas Foray CAPITALAND COMMERCIAL TRUST SGX: C61U

CapitaLand Commercial Trust - Maiden Overseas Foray


Raise Target Price by 1%; maintain HOLD

  • CapitaLand Commercial Trust (CCT)’s recent acquisition of a German property, Gallileo, marks its maiden foray outside Singapore. We believe overseas expansion is necessary for growth as domestic investment opportunities are increasingly limited. 
  • While the acquisition cap rate of 4.0% is fairly low, CCT managed to capitalise on cheap EUR funding for mild DPU accretion.
  • We keep FY18E DPU unchanged but raise FY19-20E by 1% for Gallileo’s contributions.
  • We roll forward our valuation, still based on a 5% yield target. This lifts our Target Price to SGD1.82. Maintain HOLD as valuations appear fair.
  • Prefer developer landlords, UOL and GuocoLand, for office exposure.



Prime property with stable income

  • CCT is acquiring a 94.9% stake in Gallileo, a prime freehold commercial property in the CBD of Frankfurt, Germany. CapitaLand holds the balance 5.1%.
  • The fully leased property is 98% occupied by anchor tenant, Commerzbank AG (CBK GR, Not Rated), whose rents are adjusted based on an inflation index every two years.
  • With a long WALE of 10.6 years backed by a blue-chip tenant, we believe CCT has acquired a very stable stream of income. Its acquisition price of EUR356m is at a 1.4% discount to an independent valuation by Cushman & Wakefield, which implies an NPI yield of 4.0%.


Necessary step

  • With limited domestic opportunities, management has boldly moved beyond its comfort zone with this acquisition. It is in line with its articulated intention to acquire properties in the gateway cities of developed markets, to expand its portfolio in the long term.
  • It hopes to increase overseas assets to 10-20% of its total eventually, from 5% after this deal.


Mildly-accretive

  • The acquisition will be funded by 62% debt and 38% equity. CCT will be placing out 130m new units at SGD1.631-1.676 apiece. Pro-forma disclosures indicate a 1.4% accretion to its 1Q18 DPU, primarily from cheap funding in EUR.
  • By taking on 100% of the property’s value with EUR debt, CCT has fully hedged its balance-sheet risks. It has also effectively swapped out SGD200m of SGD borrowings at more than 2.5% for cheaper EUR debt of about 1.4%.


Swing Factors 


Upside 

  • Appreciation in the capital value of its properties. 
  • Successful redevelopment of assets, such as Golden Shoe Carpark. 
  • Earlier-than-expected rebound in office rents. 

Downside 

  • Sharper-than-expected declines in office rents or occupancies. 
  • Overpaying for acquisitions. 
  • Cost overruns in redevelopment projects. 





Derrick Heng CFA Maybank Kim Eng | https://www.maybank-ke.com.sg/ 2018-05-17
SGX Stock Analyst Report HOLD Maintain HOLD 1.82 Up 1.800



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