CCT – CIMB

Starhub Centre sold

Starhub Centre sold for S$380m

Maintain OUTPERFORM and target price of S$1.37. CCT announced that it will be selling Starhub Centre to Fraser Centrepoint Limited (FCL) for S$380m or 42.5% above the last valuation. The proceeds from the sale are earmarked for acquisitions and debt repayment. We are positive on the sale due to the premium sale price and believe the lowered asset leverage positions CCT well for future refinancing needs.

We maintain our earnings estimates and DDM target price of S$1.37 (discount rate 7.8%), pending the announcement of their 2Q10 results on 21 Jul. More clarity on the repayment quantum, potential accretive acquisitions and early refinancing of debt will provide further catalysts for this stock. Our current DPU estimate of 7.99 Scts for FY10 represents a 6.1% yield and CCT remains the cheapest large cap stock in the SREIT space.

The news

Sale price of S$380m, 42.5% above valuation. The sale of Starhub Centre was conducted via a formal tender process by an appointed property consultant. The sale of Starhub Centre and the non-participation of CCT in the redevelopment of a nonoffice asset falls within our expectations (see our note entitled “Holding up well”, 19 Apr 2010) and is in line with the management’s intention to move away from non-core assets towards Grade A assets. Nevertheless, we are pleasantly surprised that the sale price of S$380m or S$1,354psf for NLA of 280,066 sq ft is 42.5% higher than Starhub Centre’s last valuation as at Jun 2010, which was S$266.7m or S$952psf. After adjusting for divestment-related costs, the estimated net gain to CCT is about S$109.1m. FCL intends to redevelop Starhub Centre as a high-end residential and retail development. The sale is expected to be completed around 16 Sep 2010.

Use of sale proceeds. Management intends to use the sale proceeds for acquisitions and/or to pare down debt. Management had also implied earlier that a special dividend is unlikely. We believe that CCT will acquire another office asset in the near term although potential targets are unclear at this point of time.

Valuation and recommendation

DPU for FY10 will fall 2-7% over FY10-11 with no debt repayment. Based on 1Q10 results, Starhub Centre contributed only 4% to CCT’s portfolio net property income. Assuming Starhub Centre contributes nine months of revenue (if the sale is completed by end-Sep) and there is no repayment of debt, DPU for FY10 will fall 2-7% over FY10-11. However, with the paring down of debt, the interest expense is likely to fall by 4Q10, moderating the fall in DPU, in our view.

Asset leverage to reach below 30% by Sep. The current asset leverage of CCT is 32% and we expect this to go down to about 26% after the completion of the sale in Sep, assuming there are no other key developments. We believe this highly improves CCT’s position to refinance its relatively chunky debt, which is due to expire in 2011, at more attractive interest rates.

Maintain estimates and target price for now. We are positive on the sale of Starhub Centre at an attractive premium over valuation and believe this will provide short-term catalysts for this stock. We maintain our current DPU estimates, pending the release of CCT’s 2Q10 results on 21 Jul. More clarity on the repayment quantum, potential accretive acquisitions and early refinancing of debt will provide further catalysts for this stock. Our current DPU estimate of 7.99 Scts for FY10 represents a 6.1% yield and CCT remains the cheapest large cap stock in the SREIT space. We maintain our OUTPERFORM call at an unchanged DDM target price of S$1.37 (discount rate 7.8%).