Share Price S$1.47
Target Price S$1.74
CapitaCommercial Trust (CCT) is an office REIT with a portfolio of prime and Grade-A properties in Singapore, including Capital Tower, Six Battery Road, Raffles City and One George Street.
• Acquisition headroom of S$1.1b from the lowest gearing of 29.5% among large-cap office REITs, with a call option to acquire the remaining 60% stake in key pipeline property CapitaGreen (40%-owned) in 4Q14.
• CapitaGreen is the only Grade-A office tower expected to be completed in the core CBD in 2014. We expect office rentals to rise 8% in 2014 after bottoming in 2013, as office demand is anticipated to rebound on the back of an improving global outlook, while demolitions and conversions could remove over 60% of upcoming supply in 2013-14. Competing completed Grade-A properties in the core CBD are also largely committed.
• Attractive valuations at 5.4% forward yields and P/B of 0.88x. Valuations are attractive at 5.4% forward dividend yields, compared with 3.0-3.5% NPI yields for physical offices. P/B is also undemanding at 0.88x.
• Positive rental reversions to continue with average portfolio rents rising 0.9% qoq to S$8.03psf pm in 3Q13 from S$7.96psf pm in 2Q13. Committed rents in 3Q13 were 5-15% above expiring rentals. Management anticipates that rental reversions will continue to be positive going into 2014.
• Expiry of yield protection for One George Street on 10 Jul has been largely mitigated by positive rental reversions from other office buildings and lower interest expenses. This was the key concern weighing down sentiment for CCT and the encouraging resolution with minimal impact to DPU will improve the outlook for the counter.
• Maintain BUY on CCT with a target price of S$1.74 based on DDM (required rate of return: 7.2%, terminal growth: 2.2%).
Publish date: 28/11/13