CapitaLand Commercial Trust - RHB Invest 2019-04-22: Risk-Reward Profile Finely Balanced


CapitaLand Commercial Trust - Risk-Reward Profile Finely Balanced

  • Maintain NEUTRAL, Target Price of SGD1.86 reflects 4% downside.
  • CapitaLand Commercial Trust’s 1Q19 results are in line, at 24% of our full-year forecast. Key catalysts are the announcement of redevelopment plans for 21CQ, yield-accretive acquisition of the remaining stake in CapitaSpring and overseas assets. Despite its positive outlook, its valuation of 1.1x P/BV and FY19F yield of ~5% are not compelling enough, in our view.
  • We recommend investors to buy the stock on dips.

Potential equity fund-raising on the cards if CCT pursues Duo Tower.

  • Bloomberg earlier reported that CAPITALAND COMMERCIAL TRUST (SGX:C61U) is vying to acquire Duo office and retail tower, which could be valued at over SGD1.5bn. See report.
  • We believe that CapitaLand Commercial Trust may use a mix of 40% equity and 60% debt if it decides to pursue the acquisition, to keep net gearing optimal (~38%) post acquisition. This, however, will lead to major equity fund-raising of ~SGD600m (potentially from share placement and preferential offerings) – which may lead to a near-term overhang on its share price.

HSBC building redevelopment plans might gain favour from central business district rejuvenation theme.

  • With HSBC – currently the sole tenant of the property – vacating the premises on Apr 2020, CapitaLand Commercial Trust could potentially look at redeveloping the property and tapping into any additional benefits from the CBD rejuvenation theme in the draft master plan (2019).
  • CapitaLand Commercial Trust has highlighted that the immediate focus will be on refurbishment and re-letting the premises. Management has, however, noted that it doesn’t expect any significant increase to the current GFA, based on the draft master plan for 2019.

Office leasing momentum remains strong.

  • CapitaLand Commercial Trust signed leases for 225,000 sqf (4Q18:143,000 sqf), of which 18% were new leases. The tenant mix of new leases was well diversified across seven sectors. We believe that most of the lease renewals were higher than expiring rental rates (~5-10%).
  • Based on CBRE preliminary data, Grade-A office rental rates rose 3.2% q-o-q in 1Q19 to SGD11.15 psf, continuing on its 15% y-o-y increase in 2018. With limited Grade-A supply in the pipeline (~1.1m sqf) , we expect the Grade-A property rental rates to rise 5-15% in 2019. CapitaLand Commercial Trust currently has about 11% of leases by rental income due for renewal in 2019, which should benefit from the current momentum.
  • Overall portfolio occupancy rate dipped 0.3ppt q-o-q to 99.1% due to the lower occupancy rate at Six Battery Road where it dropped to 97.6% from 100%. Considering the strong demand for prime office space, we believe CapitaLand Commercial Trust will be able to backfill the space in the coming quarters.

Slight reduction in debt costs.

  • Average cost of debt stood at 2.5% pa (4Q18:2.6%,) with 92% of its debt on fixed rates.
  • Weighted average debt to maturity currently stands at 3.6 years.

CapitaSpring – 24%-leased, additional leasing to commence soon.

  • Construction works are on track to be completed by 1H21. As of now, JP Morgan has signed up to be the anchor tenant for office space, taking up ~24% of the NLA. Management plans to open a show suite on the site and will commence leasing for the remaining space.
  • Based on our calculations, the targeted yield on cost of 5% translates into office rental rates of SGD10-11 psf – which we believe is achievable, considering the strong momentum in office space.

DPU adjustments.

  • We trim FY19F-20F DPU by 1-2% factoring in revised income for Bugis Village and a slightly lower occupancy rate for Six Battery Road.

Vijay Natarajan RHB Securities Research | 2019-04-22
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 1.860 SAME 1.860