CCT – CIMB

Outlook remains negative

• Maintain Underperform and target price of S$0.83. We now assume less severe declines in occupancy for 2010 in view of CCT’s resilience so far. However, we also expect steeper falls from current passing rents in 2010 (from no change earlier) as rents of expiring leases in CCT’s key office buildings over the next two years are significantly higher than market rents. Separately, we have assumed 20% growth for its hotel business in Raffles City in 2010, in line with our positive expectations for CDLHT. Our DPU estimates fall by 2.7% for 2010 but rise by 3% for 2011. We also roll our target price one year forward. Our DDM-derived target price remains S$0.83. Maintain Underperform as catalysts in the medium term are still lacking.

• In line. 3Q09 results met our expectations but were above consensus. YTD DPU of 5.18cts forms 74% of our full-year estimate. 3Q09 DPU of 1.85cts (24% of our fullyear forecast) declined 40.1% yoy due to a bigger unit base after its rights issue.

• Portfolio passing rents up 4.3% qoq. Net property income of S$77.1m in the quarter was up 15.5% yoy and 5.1% qoq, aided by strong rental reversions and improved operating margins, including a one-off property tax rebate. Average monthly passing rents rose 4.3% qoq to S$8.49psf from S$8.14psf in 2Q09. This was in-between CBRE’s estimate for Grade A office rents of S$8.80psf/month and prime office rents of S$7.50psf/month.

• StarHub’s lease ended; portfolio occupancy down to 94%. CCT’s portfolio occupancy dipped to 94% from 96.2% primarily due to the non-renewal of lease by major tenant StarHub at StarHub Centre. Improved occupancy at Golden Shoe Carpark (+6.4% pts), Wilkie Edge (+2.2% pts) and Six Battery Road (+1.5% pts) mitigated the impact.

• P/BV may increase. CCT’s P/BV of 0.7x is below the SREIT sector’s average of 0.8x. However, we do not think CCT is cheaper than its peers as we expect another round of asset devaluation in December to close the P/BV gap.