CapitaLand Commercial Trust - RHB Invest 2019-01-25: In A Better Position

CAPITALAND COMMERCIAL TRUST (SGX:C61U)

CapitaLand Commercial Trust - In A Better Position

Maintain NEUTRAL but raise Target Price by 3% to SGD1.86, 1% upside, with a 5% yield.
CapitaLand Commercial Trust’s (CCT) 4Q/FY18 results met expectations. We have revised our FY19-21 DPU estimates by 1-4% factoring in strong momentum in Grade-A office rentals which is expected to continue in FY19-20.
Key catalysts are the announcement of redevelopment plans for 21CQ, accretive acquisition of remaining stake in CapitaSpring and overseas assets.
Despite a positive outlook, a 1.0x FY19 P/B valuation and FY19F yield of 5.0% are not compelling in our view so we would recommend investors to buy on dips.

Based on CBRE preliminary data, Grade-A office rents rose 15% y-o-y in 2018 to SGD 10.80 psf. With limited Grade-A supply in the pipeline (c.1.1m sqft), we expect Grade-A rents to rise 5-10% in 2019. The favourable outlook would benefit CAPITALAND COMMERCIAL TRUST (SGX:C61U) which has about 15% of leases (as % of rental income) due for renewal this year.
With average expiring rents of these leases already 4% below current market rents, we expect a healthy positive reversion of 5-15% for 2019.

Management noted that it is currently considering refurbishment plans for 21CQ (NLA of 200,000 sqft) with a view of re-leasing the entire space. To recap, HSBC is currently the sole tenant of the building and recently extended its lease-term until Apr 2020. Plans are still in early stages but CapitaLand Commercial Trust noted that refurbishment works would be planned to achieve a minimum downtime.
With office rental expected on an uptrend until 2021, we believe such a move will be favourable to unit holders. Management is also open to redeveloping or divesting the asset if a compelling opportunity arises.

Construction works are on track to be completed by 1H21F. As of now, JP Morgan signed up to be the anchor tenant for office space taking up c.24% of the NLA. Management plans to open a show suite on the site and commence leasing for the remaining space.
We see more upside to its targeted yield on cost of 5% if the office rental momentum continues.

For the markets overseas, management still prefers gateway cities in Germany for its sound fundamentals, but reiterated that overseas assets are unlikely to exceed 20% of its portfolio.
We also see the possibility of CapitaLand Commercial Trust exercising its call option to acquire the remaining 55% stake in CapitaSpring closer to its completion. Gearing is comfortable at 34.9%, presenting a debt headroom of c.SGD800m (assuming 40% levels) for acquisitions.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-01-25

SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 1.86 UP 1.800