CCT – CIMB
Dilutive cash call
1-for-1 renounceable rights issue to raise S$828.3m
Last Friday, CCT proposed a renounceable 1-for-1 rights issue to raise gross proceeds of S$828.3m. The rights will be fully underwritten by DBS, Cazenove and UOB. All eligible unitholders will be entitled to subscribe for one rights unit offered at S$0.59/unit. This is a 44.3% discount to CCT’s closing price of S$1.06 on 21 May 09; a 28.5% discount to its theoretical ex-rights price (TERP) of S$0.825/unit; and a 60.9% discount to its adjusted NAV of S$1.51 (taking into account valuations as at 22 May 09 and the completion of the rights issue).
Parent CapitaLand (CAPL SP, S$3.43, Underperform, target price S$1.84) has committed to a full subscription of its pro-rated entitlement, thus maintaining its 31.4% shareholding in CCT.
New SGX measures: unitholders’ approval not required. In order to facilitate fundraising, the Singapore Exchange had announced on 19 Feb 09 that it would be allowing listed issuers to issue up to 100% of their issued share capitals via pro-rated renounceable rights issues, up from the previous limit of 50%. Hence, unitholders’ approval is not required for this proposed rights issue, although in-principle approval from SGX is still pending.
Asset values down 10% since Dec 08. CCT’s portfolio was valued at S$6,029.6m as at 22 May. Desktop valuations reflect asset-value declines of S$681m (or 10.1%) from 1 Dec 08. Cap rates for Raffles City had increased 0.1% for the three components (office, retail and hotel), while rates for the rest of the portfolio were unchanged. However, the valuers – Jones Lang LaSalle and Knight Frank – had assumed sharper rental declines of 47-70% between now and end-2012. These represent a projected straight-line decline of 20% p.a., in line with market expectations. We understand that occupancy assumptions have also been pared down although management did not elaborate on the extent. After this valuation, CCT’s asset leverage will be 43.1%, up from 38.3% as at 31 Mar 09.
Cash call to pare down debt. Management intends to allocate 85-95% of the gross proceeds to reduce borrowings of S$2.6bn as at 31 Mar 09. The balance will be used for capital expenditure, general corporate and working capital purposes, and expenses in connection with the rights issue. After the rights issue, the company estimates that its asset leverage will decrease to about 30.7% from 38.3% in 1Q09.
Valuation and recommendation
Disappointed but not surprised. CCT’s rights issue will be painfully dilutive, in our view. We note that last quarter’s stated NAV of S$2.49 will be eroded by 40% down to S$1.51 post rights issue. Out of this, only 10% is accounted by asset devaluation, and the remaining from the share base dilution. Nonetheless, at a 44.3% discount to its last traded price, there is little reason for investors not to take up the offer. Estimated dividend yields of 11.6% based on the rights price of S$0.59 are in line with CMT’s offer at 11.4%. Despite CCT’s significant debt over 2010-12, we earlier believed that CCT would have the capacity to refinance with straight debt. This stems from the fact that its parent remains well-capitalised. CCT’s average cost of debt remains low at 3.6%. About S$665m of CCT’s S$1bn MTN programme is still untapped, and S$2bn worth of assets remain unencumbered. Our belief had been further strengthened by Suntec REIT’s (SUN SP, Not Rated) successful refinancing of more than S$825m, even without a strong sponsor. Hence, we were disappointed by the announcement, and the implied dilution.
No doubt, the decision to make a cash call was catalysed by positive market reactions to the succession of cash calls from CapitaMall Trust, CapitaLand and KepLand. Conditions were encouraging after a 74% price rally (from a low of S$0.61 in Mar 09) and the timely waiver of the requirement for unitholders’ approval for up to 100% of its issued share capital via a pro-rated renounceable rights issue. A lower leverage will relieve pressure on the management to refinance consecutive years of large debt, which could grow increasingly difficult, particularly when the outlook for office-sector rents remains bleak for the next four years, and asset values may fall further.
Downgrade to Underperform from Outperform; new target price of S$0.71 (from S$1.12). We factor in an increased share base from the rights issue and our DPU estimates fall by 37-39% for 2009-11. Our post-rights target price is S$0.71, down from S$1.12. While the rights issue is likely to remove the funding overhang for CCT, and we could see a short-lived price rally till the end of “cum-rights” trading on 2 Jun 09, we see almost no reason for any earnings upgrade in the medium term, as upcoming office supply over the next few years remains significant.
We recommend existing investors to switch to our sector top pick Fraser Centrepoint Trust at 0.68x P/BV for its strong balance sheet, lack of refinancing concerns and exposure to the more resilient suburban mall sector.