CapitaLand Commercial Trust: OCBC Investment 2020-01-24: Big Is Better

CAPITALAND COMMERCIAL TRUST (SGX:C61U)

CapitaLand Commercial Trust - Big Is Better

CAPITALAND COMMERCIAL TRUST (SGX:C61U)’s 4Q19 results met our expectations. Gross revenue and NPI increased by 8.9% and 3.3% y-o-y to S$107.8m and S$81.9m, respectively. DPU grew 2.7% y-o-y to 2.28 S cents.
For FY19, both CapitaLand Commercial Trust’s NPI and DPU rose 2.1% to S$321.2m and 8.88 S cents, respectively, with the latter forming 100.2% of our full year forecast.
See Capitaland Commercial Trust Dividend History; Capitaland Commercial Trust Announcements.

CapitaLand Commercial Trust’s rental reversions remained largely robust, with the exception of Asia Square Tower 2 (AST2), which saw negative rental reversions. To put things in perspective, committed rents (psf/month basis) at AST2, Six Battery Road (6BR), CapitaGreen and Raffles City Tower were S$11.50-S$12.00, S$11.90- S$14.00, S$11.00-S$12.60 and S$9.20-S$11.00, versus average expired rents of S$12.69, S$11.67, S$9.83 and S$9.07, respectively.
Looking ahead, although core Grade A CBD office rents appear to be peaking, we note that CapitaLand Commercial Trust’s average expiring rent of S$9.43 psf/month in FY20 is still at a significant level below current market rents of ~S$11.55 psf/month.
In terms of portfolio valuation, there was a mild compression in cap rates by 5 bps across its properties as compared to end-2Q19, with the exception of Raffles City Singapore’s retail and hotel components (unchanged). A revaluation gain of S$94.7m was thus recorded in FY19.

Separately, there was also an announcement on a proposed merger between CapitaLand Commercial Trust and CapitaLand Mall Trust (SGX:C38U) via a trust scheme of arrangement. Under this scheme, CapitaLand Mall Trust will acquire all units of CapitaLand Commercial Trust for 0.72 new CapitaLand Mall Trust units and S$0.2590 in cash per CapitaLand Commercial Trust unit. This translates into a scheme consideration of S$2.1238 per CapitaLand Commercial Trust unit, of which 88% is in units and 12% in cash. See Capitaland Commercial Trust Latest News.
The enlarged entity will be named CapitaLand Integrated Commercial Trust and is expected to have a portfolio property value of S$22.9b and market cap of ~S$16.8b, which would make it the third largest REIT in APAC by market cap.
We are largely positive on this transaction from CapitaLand Commercial Trust unitholders’ perspective, as the scheme consideration price of $2.1238 is above our revised S$1.95 fair value (previously S$1.92) for CapitaLand Commercial Trust.
Besides the clear benefits of an enlarged scale, DPU accretion on a pro forma basis is strong at +6.5% for CapitaLand Commercial Trust’s unitholders, although it is dilutive on its NAV/unit by 2.2%. Pro forma aggregate leverage is expected to be 38.3% after the merger (CapitaLand Commercial Trust: 35.1% as at 31 Dec 2019). ACCEPT THE OFFER.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-01-24

SGX Stock Analyst Report ACCEPT OFFER MAINTAIN SELL 1.95 UP 1.920