CCT – Daiwa

Major challenge: enlarging the office portfolio

Fully-valued for recent stability and future risks

We maintain our 3 (Hold) rating for CCT, and believe the current unit price reflects fully a more stable office market, but with lingering short-term uncertainty ahead of the MBFC phaseone opening (in 2Q10) and an outlook clouded by further supply risks in 2011 and 2012. 

Leasing skills likely to be put to the test in FY10-12

The CCT manager’s industry-leading leasing skills were apparent during the most recent office-market peak, as the key buildings in CCT’s portfolio enjoyed high occupancy rates and rents. We believe these skills will be put to the test again as the incoming CBD supply would naturally draw tenants from its existing buildings. 

Our thoughts on CCT’s portfolio reconstitution

Before investors get carried away by CCT’s recent portfolio reconstitution announcements, the divestment of Robinson Pointand redevelopment potential of StarHub Centre (almost a done deal, in our opinion, but still subject to approval from other government authorities), we believe it would be critical from a recurrent-income perspective for CCT to be able to swap these assets for investment-grade office assets. With cap rates for Singapore offices starting to narrow, we do not believe it would be easy for CCT to acquire assets in a DPU-accretive manner. We believe potential acquisitions could even be put on hold to facilitate potential debt refinancing for FY11 (when the put option on its S$370m convertible bond could be exercised in May and a S$520m CMBS for Raffles City would be due in September). 

DPU forecasts revised down by 0.7-9.0%

We have revised down our DPU forecast by 9.0% to 6.76¢ for FY10. We had assumed (erroneously) that the estimated divestment gain of about S$19m from the disposal of Robinson Point would be distributed to unitholders. The manager has clarified that the proceeds from the disposal would be retained for financial flexibility. Our DPU-forecast revisions for FY11 and FY12 are negligible. 

Six-month target-price raised to S$1.19 (from S$1.17)

We have raised our six-month target price, based on parity to our RNG valuation method (a finite-life Gordon Growth model), to S$1.19 from S$1.17, after lowering our (long-term) cost-of-debt assumption to 4.0% from 4.2%. Our core operating income estimate assumes average (monthly) passing rents of S$6.50 for Capital Tower, S$10.00 for Six Battery Road, and S$9.00 for 1 George Street.