CCT – JPM

Pricing in the rights issue

• 1-for-1 rights issue announced to raise S$828.3 million. CCT announced that it will issue 1.4 billion new shares through a 1-for-1 rights issue, priced at S$0.59/rights unit to raise S$828.3 million. The rights issue is fully underwritten, and CapitaLand will take up their prorata share of 31.4%. The proceeds from the rights issue will be primarily used to reduce the borrowings. In addition to the rights issue announcement, the trust has revalued its investment property down by 10.1% to S$6billion. Assuming debt is reduced by S$760million, gearing will be 30.7% post rights issue and devaluation.

• Adjusting our estimates for rights, Dec-09 price target of S$0.85. We have revised down our DPU estimates for FY09/FY10 by 41%/38% to account for the rights issue, and book value has been reduced by about 40% to S$1.52/unit for 2009. Based on a discount rate of 8.0% (8.6% previously), our new Dec-09 DDM-based price target is S$0.85/unit (S$0.81/unit previously).

• Short-term risk biased on the upside, but operating fundamentals remain challenging. The announcement of the fully underwritten rights issue would, in our view, remove the EFR overhang on CCT, and we do see some short-term upside risk to the share price. That said, we believe that operating fundamentals are still challenging in the medium term and that the current share price largely reflects the income stream from the underlying portfolio based on post rights NPV. We therefore retain our Neutral rating on CCT.

• Key risks to our rating and price target on the upside include 1) market’s increasing risk appetite for relatively higher beta stocks; 2) a quicker-than-expected bottoming out and recovery of the rental market. Key downside risks include a worse than expected rental reversion.