CCT – CIMB
Delayed earnings
• Slightly below. DPU grew 16.1% yoy to 2.1cts in 3Q07, driven mainly by strong rental reversions for office assets. However, YTD DPU of 6.5cts represents 72% of our forecast and 73% of consensus’s.
• Strong reversions, but NPI margins fell. Strong office rental reversions continued amid a supply crunch, driving up 3Q07 gross revenue by 57.2% yoy to S$60.7m. However, net property income margins dipped 2% pts qoq to 71.2%. This was attributed to the temporary loss of income during asset enhancement work and the repositioning of tenants in Raffles City, Golden Shoe Car Park and Starhub Centre, as well as increases in property tax for Capital Tower and higher utilities for Market Street Car Park. In view of rising property expenses, we expect net property income margins to stay at such levels for the rest of 2007.
• Expanding through asset enhancement and acquisitions. Phase 1 of CCT’s extensive asset enhancement and repositioning efforts at Raffles City is expected to end in time for Christmas. When completed, retail space is expected to increase by 40,000 sf, or 11.5% of the current retail NLA. Pre-commitments for the additional space stand at 99%. In addition, an EGM will be held next month to obtain unitholders’ approval to acquire Wilkie Edge, a mixed retail and office project at Selegie Road being developed by its parent, CapitaLand, for S$262m. Approval is very likely and the resulting income, expected from 2009, has been assumed in our valuation. We believe CCT is on target to achieve S$6bn of assets by 2009 via acquisitions from its parent.
• Maintain Neutral; DPU and target price adjustments. We are adjusting our DPU estimates to reflect increased earnings from asset enhancement in 2008, and continued strong office rental reversions in 2008-09 when more office leases expire. We have cut our DPU estimates by 11% to 8.5cts for 2007 and raised estimates by 2% to 10.7cts for 2008. Accordingly, we have raised our end-2008 DDM-derived target price from S$2.75 to S$2.80 (cost of equity 5.3%). As there is limited upside to our target price, maintain Neutral.