CCT – CIMB

Bleak outlook

• Maintain Underperform. CCT’s rights issue, completed in Jul 09, has strengthened its balance sheet to 31% leverage from 43%, at a price of a doubled share base. There remains large debt due for refinancing over 2010-11 while the outlook for office-sector rents remains bleak for the next three years with a large supply in the pipeline. Taking into account its pared-down debt, we estimate implied yields at 6.3%, translating into expected rents of S$5.20psf. We expect another round of asset devaluations to close the gap between implied and actual yields.

• Evidence of pick-up in leasing volumes. Recent evidence of increased leasing volumes following a sharp fall in market asking rents suggests that our earlier occupancy assumptions might have been too severe (we were expecting a fall to the last crisis levels of about 85%).

• DDM-derived target price raised to S$0.76 (from S$0.71). We now expect office occupancy to decline to 93% over 2009-11, instead of 88%. Additionally, we use a lower discount rate of 10.2% (from 10.4%) based on a lower risk-free rate of 4.8% applied across our REIT universe. Our new target price prices in three consecutive years of decline in DPU. We maintain our Underperform rating as catalysts within the three years are still lacking.