CapitaLand Commercial Trust - Phillip Securities 2018-07-02: Portfolio Reconstitution Continues With Twenty Anson Sale

CapitaLand Commercial Trust - Phillip Securities 2018-07-02: Portfolio Reconstitution Continues With Twenty Anson Sale CAPITALAND COMMERCIAL TRUST SGX: C61U

CapitaLand Commercial Trust - Portfolio Reconstitution Continues With Twenty Anson Sale

  • CapitaLand Commercial Trust (CCT) to sell Twenty Anson for S$516mn, 19% above last valuation as at 31 Dec 2017.
  • Favourable exit yield of 2.7%, vs 3.2%-3.4% for previous divestments in 2017.
  • Decent IRR of c.7% achieved over 6-year ownership period of Twenty Anson.
  • Expect loss of rental income to be topped up with divestment proceeds.
  • Maintain ACCUMULATE with unchanged Target Price of S$1.88.



What is the news?

  • CapitaLand Commercial Trust (CCT) has agreed to sell Twenty Anson, a twenty-storey prime office building in Tanjong Pagar to an unrelated third party for S$516mn. The sale consideration is 19% above the S$433mn valuation as at 31 December 2017.
  • Twenty Anson accounted for about 5.5% of CCT’s FY17 net property income (NPI). Completion of sale is expected in 3Q18.


The Positives


+ Favourable exit yield of 2.7%.

  • This exit yield based on Twenty Anson’s NPI of S$13.8mn for the 12 months preceding 31 March 2018, is even more attractive than the 3.4% and 3.2% exit yields for Wilkie Edge (WE) and One George Street (OGS) sold by CCT last year.

+ Further showcasing ability to rejuvenate portfolio and effectively recycle capital.

  • Through the 3 local divestments (WE, OGS, TE) and 1 acquisition (Asia Square Tower 2, AST2) since 2017, Management has repeatedly demonstrated the ability to effectively recycle capital and rejuvenate the portfolio for enhanced returns. 
  • Using the latest local acquisition as example, AST2 had a yield on cost of 3.6%, based on committed occupancy of 88.7%. The 3 divestments were at lower exit yields, despite having shorter (or similar) land leases remaining. This effectively means capital has been effectively recycled into a higher yielding asset, with comparable or better potential for growth in the vibrant Marina Bay district.

+ Decent IRR achieved over 6-year ownership period of Twenty Anson.

  • Recall CCT purchased Twenty Anson for S$430mn in 2012 with a yield on cost of c.4%. Throughout the 6-year holding period, CCT would have achieved unlevered IRR of c.7%, vs the average cost of capital of c.4.6%, by our estimates.

+ Reduced gearing provides ample firepower to fund future growth.

  • Assuming divestment proceeds are used to pare down debt, aggregate leverage would drop from 37.9% in 1Q18 to 34.5%.


Outlook


Twenty Anson contributed only c.5.5% of CCT’s FY17 NPI. 

  • We expect any loss of rental income from 3Q18 to be topped up with divestment proceeds. With only 8% of debt next due for refinancing in FY19 and 90% of debt on fixed rates, interest rate risks are mitigated. CCT will benefit from expected rising office rents due to tapering supply.
  • We expect office rents to grow 5-10% in 2018.


Maintain ACCUMULATE with unchanged target price of S$1.88

  • We adjust our forecasts to factor in the divestment. Our forecasted CAGR growth for DPU from FY17-FY19 is at 3.4%.
  • Our target price translates to an FY18e yield of 4.7% and P/NAV of 0.97x.





Dehong Tan Phillip Securities | https://www.stocksbnb.com/ 2018-07-02
SGX Stock Analyst Report ACCUMULATE Maintain ACCUMULATE 1.880 Same 1.880



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