CapitaLand Commercial Trust - CGS-CIMB Research 2020-04-29: Taking A Prudent Stance

CAPITALAND COMMERCIAL TRUST (SGX:C61U)

CapitaLand Commercial Trust - Taking A Prudent Stance

CapitaLand Commercial Trust's 1Q20 DPU of 1.65 Scts is below our estimate, at 18.4% of our FY20 forecast.
Rental reversion has been positive but leasing outlook remains challenging.
Reiterate ADD with a lower DDM-based Target Price of S$1.98.

CapitaLand Commercial Trust (SGX:C61U) reported 1Q20 gross revenue/NPI of S$103.6m/S$80.3m, up 3.8%/0.7% y-o-y, driven by contributions from Main Airport Center and higher income from 21 Collyer Quay, Gallileo and CapitaGreen, and partly offset by lower income from 6 Battery Rd. See CapitaLand Commercial Trust Announcements. However, distributable income to unitholders declined 23% y-o-y to S$63.7m due to retention of taxable distributable income and no distribution of tax exempt income during the quarter.
1Q20 DPU of 1.65 Scts is 25% lower y-o-y. See CapitaLand Commercial Trust Dividend History. CapitaLand Commercial Trust indicated that it would review the amount of income retained at the end of 2Q20.

Portfolio occupancy slipped 2.8% pts q-o-q to 95.2% at end-1Q due to lower occupancy at CapitaGreen, 6 Battery Rd and Raffles City office.
CapitaLand Commercial Trust signed leases for 303k sq ft of space in 1Q, largely renewal demand, with positive rental reversion. It has a remaining 9% of office and retail leases to be renewed over the rest of FY20F, and a further 25% in FY21F.
With expiring rents averaging S$9.37-10.68 psf in FY20-21F, we think it would continue to enjoy positive rental reversion, although at a more modest spread. That said, we moderated the pace of backfilling of portfolio vacancies as leasing appetite slows in the current sluggish economic environment.
CapitaLand Commercial Trust has committed c.S$25.8m, inclusive of property tax rebate, to support its tenants affected by COVID-19. It will pass on the property tax rebate to its office, retail and hospitality tenants, extend rent rebates for Apr and May to its retail tenants, and waive turnover rents for its hospitality tenant for Apr.

CapitaLand Commercial Trust continues to undertake proactive asset management and leasing to drive medium-term organic growth. 6 Battery Rd has been partially closed since Jan as it goes through a S$35m asset enhancement initiative (AEI). However, management indicated that phasing of works may be delayed due to the circuit breaker implementation while 21 Collyer Quay will be completely closed from May for refurbishment. The group targets to achieve an 8-9% return on investment on these initiatives, to be completed in 2021.

CapitaLand Commercial Trust's aggregate leverage stood at 35.5% at end-1Q20, with a healthy interest coverage ratio of 5.7x. CapitaLand Commercial Trust has a small 3% of its debt to be refinanced this year. 85% of its borrowings are on fixed rates.

We cut our FY20-21F DPU estimates by 12-14% to factor in slower office leasing activities, provision of rent rebates for its retail tenants, and longer downtime to fill its office vacancies.
Nonetheless, we maintain our ADD rating, with a lower DDM-based Target Price of $1.98.
See CapitaLand Commercial Trust Share Price; CapitaLand Commercial Trust Target Price; CapitaLand Commercial Trust Analyst Reports; CapitaLand Commercial Trust Dividend History; CapitaLand Commercial Trust Announcements; CapitaLand Commercial Trust Latest News.
Potential re-rating catalyst: faster-than-expected leasing demand recovery.
Downside risk: protracted economic recovery that will dampen demand for office space.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-04-29

SGX Stock Analyst Report ADD MAINTAIN ADD 1.98 DOWN 2.280