CCT – GS

Starhub sale books gain; our preferred office company

What’s changed

On July 16, CCT announced the sale of office building Starhub Centre to Frasers Centrepoint for S$380mn or S$1,357psf. The divestment of Starhub Centre and an earlier sale of Robinson Point in 1Q10 for S$203mn (S$1,527psf, gain of S$19mn) are inline with its broader strategy to unlock value. The sale is done at a 42.5% or S$113.3mn, above the appraised valuation of S$266.7mn, and will book one-off gain of S$109.1 mn with net proceeds of about S$375.8mn. CCT’s appraised book will improve by 3% to S$1.43/share. Starhub Centre is a non-Grade A office building (280,069sqft NLA) located off shopping district Orchard Road, and has 85 yrs in its land lease; it accounts for about 5.0% of portfolio asset value, approximately 4.0% of NPI.

Implications

CCT’s decision to divest rather than participate in the redevelopment of the property into Residential is as expected, with the sale gain of S$109.1mn coming in above our expectations (est. S$80mn gain). The sale makes business sense; we estimate CCT would have had to achieve office rentals closer to S$6.9psf vs. current passing rents of below S$6psf in order for Starhub to have been revalued at S$380mn (assuming no change of use). We believe the recent asset sales could assure investors that progress is underway to upgrade its portfolio mix, addressing concerns that it may be losing its foothold in the office space with its older portfolio. With a strengthened cash position, CCT has the capacity to acquire Grade-A assets (up to S$1.2bn) without having to return for a cash call. With spot rents stabilizing and as confidence in appraised valuations grows, we believe CCT’s gap to BVPS will close.

Valuation

Valuation and our 12-m DCF-based TP of S$1.42 are unchanged. The sale could raise 2010E net income by 50%, but will lower core earnings and DPU by 4% with the fall in rentals.

Key risks

Key risk to our investment view includes a slowdown in job additions.