CCT – OCBC
Tough operating conditions in 2010
Negative rental reversion to kick in in 2010. Going into 2010, we expect operating conditions to get tougher for CCT. Negative rental reversions are likely to set in as the higher rents secured in 2007 will be due for renewal in 2010. Some of these expiring rents (at Six Battery Road and Raffles City Tower) are significantly higher than the current Grade A office rents of S$8.80 psf pm. Although the decline in office rents has slowed, the downward pressure is expected to persist with the upcoming supply of new office spaces in 2010 and we believe that this could widen the negative reversionary gap.
No major refinancing in 2010. CCT did a Rights issue in mid-2009 and after repaying its borrowings with part of the proceeds from the issue, gearing level is now at a comfortable 31.2%. For 2010, CCT has S$235m of medium-term notes due for refinancing and this could be partially repaid using the remaining balance of the Rights proceeds of ~S$140m. On this assumption, we estimate that CCT’s gearing would fall to 29.7% after refinancing the borrowings due in 2010.
Acquisition plans may be constrained by refinancing in 2011. While CCT’s low gearing gives it significant headroom for debt-funded acquisitions, we believe that the significant refinancing needs in 2011 will be the key focus of management in 2010 and this could limit CCT’s acquisition plans. CCT has total borrowings of S$652m due for refinancing in 2011 and this figure could increase by S$370m if the convertible bond holders exercise their put option.
Maintain HOLD; Buy at more attractive valuation and yield. Undeniably, CCT has a strong portfolio of quality assets and tenants that make it stand out as one of the stronger office landlord in Singapore. Nevertheless, on absolute and relative basis, valuation and DPU yield are no longer attractive in our view, after the recent gain in share price. CCT is currently trading at a Price/NAV of 0.78x and a projected FY10 DPU yield of 5.4% whereas its closest peer, K-REIT Asia [unrated], is now trading at a Price/NAV of 0.72x and a consensus FY10 DPU yield of 6.5%. We are keeping our estimates unchanged and maintain our fair value of S$1.13 on CCT, which is pegged at par to our RNAV estimate. With a total return of 1.6%, we maintain our HOLD rating on CCT. We advise investors to accumulate at prices closer to S$1.05-S$1.10.