CCT – JPM

Calibrating our estimates

Calibrating our earnings estimates. CCT announced today that S$225mil convertible bonds due Apr 2015 have been priced at 2.7% coupon and conversion price of S$1.356/unit, with an option to upsize to S$250mil within 30 days. We have raised our earnings estimates for FY10E – FY12E by 7 – 13% as we factor in lower borrowing cost as a result of CB issuance (1.8%), previously announced results, and the divestment of Robinson Point.

Starhub Centre asset plan the near term catalyst. CCT during its full year results briefing has highlighted the potential of converting Starhub Centre into residential and commercial use building. If all relevant approvals are obtained, we believe a sale of the assets would be the most likely outcome and we see potential for the trust to realize a 10% premium to current book value (see detailed analysis inside).

Deployment of capital the key to share price performance. While we believe that CCT is trading at an undemanding valuation with 6% trough yield, the heavy equity load the trust current carries is likely to continue impacting its share price performance. Yesterday's CB issuance in our view reiterates management's intention to acquire assets in the near term. We estimate that CCT will have about S$900 million capacity for potential acquisitions before hitting 35% gearing, assuming a divestment of Starhub Centre at 10% premium to book.

We retain our Neutral rating on CCT, and continue to view Keppel Land as the preferred play on Singapore office. We raise our Dec-2010 DDM-based PT modestly to S$1.15/unit as we increase our earnings estimates but factoring in a potential dilution from the 2015-CB. Key upside risk to our rating and price target include significantly better than expected rent reversions or a quicker than expected proper deployment of excess capital. Key downside risks include a worse than expected operating performance or inability to deploy excess capital.