CCT – DBS

Equity overhang removed

• $828.3m 1-for-1 rights at $0.59 each
• Financial metrics strengthened, gearing of <31%
• DPU adjusted c37%, ex-rights yield of 8.7-8.2% over FY09-10
• Upgrade to Buy, post rights TP of $0.93

A long anticipated exercise. CCT has finally announced a $828.3m fully underwritten and renounceable rights exercise via a 1-for-1 issue of 1403.9m units at $0.59 each. The rights price is at a 44.3% discount to the last close of $1.06 and a 60.9% discount to the ex-rights book NAV of $1.51. Proceeds are earmarked primarily for reducing borrowings, with the balance for capex, asset enhancements and working capital. CapitaLand has undertaken to fully subscribe for its pro rata 31.4% share.

Strengthening financial metrics. Post rights issue, gearing would drop to 30.7%, which is at the lower end of their target gearing range of 30-45% through the cycle, putting the group in a good position to navigate through the challenging operating environment. More importantly, even with a further 30% depreciation of asset values from hereon, in line with our peak/trough projection, gearing would rise back to the higher end of its stated range. Financial flexibility is maximized with higher interest cover of 3.1-3.4x and together with the recent refinancing exercises, the group would have $2b of unencumbered assets and $665m of unutilized credit lines from its MTN programme.

Ex rights yield of 8.7%. FY09-10 DPU will adjust by 37% to 7.2cts and 6.8cts due to expansion in share capital offset by interest savings. Based on the TERP of $0.825, yield works out to be 8.7% and 8.2% respectively. Our DCF backed target price is revised to $0.93 or a 14% upside from TERP. With the removal of the equity overhang we believe investors would refocus on the core strength of its portfolio backed by its blue chip tenants with long leases, which makes up 50% of income. Upgrade to BUY.