CCT – BNP

CCT has underperformed the STI since October, tumbling 16% versus STI’s 8%. From a required returns perspective, we believe this stock has been oversold given that it now trades at a 5% FY08E yield and 215bp above the 10-year risk-free rate. Maintain BUY, with target price of SGD3.04.

More value intact

CCT has underperformed STI over past two months
Over the past two months, the share price of CapitaCommercial Trust (CCT) has underperformed the Straits Times Index (STI), tumbling 16% vs STI’s 8%. We believe concerns over prior yield compression and the narrowed spread against risk-free instruments have been overstated. To ascertain if this sell-down has been overdone, we used the dividend yield spread (over 10-year government bond yields) highs recorded since its listing to determine its floor price.

Trading at its floor price levels
CCT now trades at an FY08E yield of 5.0% (up from 4.0% in October 2007), or 215bp above the 10-year risk-free rate. This compares favourably against its 2004 average, when the stock traded at a yield spread high of 228bp and 201bp at IPO (in May 2004). Benchmarking against a yield spread of 228bp, our estimated floor price is SGD2.31. From a required returns perspective, we believe the stock has been oversold as it now trades at 2.5% above its floor price. Premising on a yield spread of 201bp, the floor price would have been SGD2.44, even offering 3% upside to its floor price (see Exhibit 3).

Significant debt head room for future acquisitions
CCT aims to increase its AUM from the current SGD4.7b to SGD6b by 2009. We believe medium-term acquisition opportunities could come from the One George Street (OGS) building, in which CapitaLand acquired the remaining 50% stake in Eureka Office Fund. OGS is valued at SGD1.2b at SGD2,700/sqft. CCT’s gearing currently stands at 27.2% (debt-to-asset ratio), which means it has debt head room of SGD1.5b before reaching its target gearing of 45%.

More value intact; TP of SGD3.04
We maintain our BUY rating and a target price of SGD3.04. CCT remains well positioned to take advantage of strong rental reversions with 50% of its office portfolio leases due for expiry in FY08-09. The stock currently trades at a 2% discount to its NAV of SGD2.40. Offering a prospective yield of 5%, we believe the stock now trades at oversold levels, which provides investors a good level for entry.