Target (SGD): 1.650
17 Feb price (SGD): 1.395
Turning green with envy
• We believe CCT is one of the best proxies for the Singapore Office Sector and its potential for a spot-rent recovery in 2014
• CCT enjoys an attractive risk-reward ratio through its CapitaGreen exposure and industry-low gearing of 29%
• We upgrade to Buy (1) from Outperform (2) with a new DDM derived 6-month target price of SGD1.69 (previously SGD1.65)
■ What's new
The unit price performance for CapitaCommercial Trust (CCT) has been unremarkable in recent months, but this could change as management begins to lease its CapitaGreen development in an office market that appears to be strengthening.
■ What's the impact
Based on its existing office portfolio and its 40% ownership of the CapitaGreen office development, scheduled to open in 4Q14, CCT offers arguably the best proxy to the Singapore office sector and its potential rental recovery. How CCT management progresses on the leasing of CapitaGreen could be a better barometer of the office market recovery, in our opinion. Management said (in late January 2014) that it was in active discussions on 350,000 sq ft of space, about 50% of the entire building. As such, a better-than expected leasing outcome could be a positive unit-price catalyst. CapitaGreen is only 1 of 2 prime grade-A office buildings scheduled for completion in late 2014. The next major infusion of office space will not be until 2016.
CCT’s gearing of 29% (as at end- 2013), is the lowest among the office S-REITs, so it is the most defensive among its peers for its DPU sensitivity to rising borrowing costs and equity fundraising risk. In fact, CCT has a high upside risk (from to its exposure to CapitaGreen) and low downside risk (from its low gearing), so we believe it is highly attractive (among office S-REITs and even all S-REITs) on a riskreward basis.
We are making minor changes to our DPU forecasts following the 4Q13 results, and are raising our 6- month target price, pegged to our DDM valuation, to SGD1.69 from SGD1.65.
■ What we recommend
In view of CCT’s role as a proxy to the office sector and its favourable risk-reward ratio, we upgrade the unit to Buy (1) from Outperform (2). A risk to our rating would be an unforeseen downturn in the officerent market.
Publish date: 18/02/14