Divesting Starhub Centre for S$380m

Second divestment this year. CCT announced the sale of Starhub Ctr, a non-grade A office off Orchard Rd for S$380m (S$1,140psf GFA) to Frasers Centrepoint through a private tender following an expression of interest. FCL, which owns the adjacent Centrepoint SC has a strategic benefit and intends to redevelop the building into a high-end mixed residential & retail. With CCT’s focus on the office sector, mgmt has decided not to participate in the redevt and expose CCT to residential devt & market risk. Starhub Ctr contributes 4% to NPI & 5% to portfolio value.

Sale price of S$380m marginally ahead of S$368m forecast and is 42.5% above its latest valuation of S$266.7m resulting in a net surplus of 109.m (3.9cts/shr) and a 2.9% boost to book NAV to S$1.41. Mgmt plans to use the net proceeds of S$375.8m for acquisitions and/or to repay debt. Depending on how the proceeds are utilized, impact to FY11/12 DPU & DDM ranges fr -4.3% (if proceeds are retained as cash) to marginally positive +1.6% (if debt is retired). With an implied exit yield of 3.2%, redeployment of proceeds into higher yielding assets would be accretive.

Strategically positive but capital redeployment crucial. We see this as a strategically positive move to crystallize value fr its portfolio & could focus attention on its underlying NAV. However, we think capital deployment is crucial to offset the earnings dilution. With its enhanced financial flexibility, CCT is well positioned for acquisitions with c.S$1.78bn in debt funded capacity (incld sales proceeds of S$579m YTD) if it gears up to 45%. Its spare balance sheet capacity also enables it to undertake the redevt of Market St Car Park, a valuable opportunity in our view given falling construction costs & DC rates. Maintain Buy with valuations undemanding at 5.6% FY10e yield and 11% disc to RNAV.

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.

Starhub Centre Sold for S$109mn Gain; N/T Positive

Quick Comment: We maintain our Overweight rating on CapitaCommercial Trust (CCT) and see the recent profitable sale of Starhub Centre as providing near-term support for the stock. While the recent strong stock price performance of +13% in the last month (vs. +4% for the STI) no longer leaves valuation looking as attractive, news flow in the office sector should remain positive as we increasingly hear of rising rents and stronger office demand for 2010. We estimate a potential impact on NAV of +5%, and impact of forgone future rentals on DPU could be as much as -1%/-5%/-4% in 2010E/11E/12E (Ex. 1). With capital values already on the uptrend (Ex.3), we think the potential for accretive acquisitions to be limited in the current environment. Hence, to avoid the drag of excess cash, we think the sizable proceeds could be: 1) distributed to shareholders – potentially S$0.13 per share, 11% of the current stock price; or 2) used to reduce debt and interest expense – up to 4% addition to DPU (Ex. 2).

What’s new: CCT announced the sale of Starhub Centre to Frasers Centrepoint for S$380mn (net: S$375.8mn), expected to complete on September 16, 2010. CCT gains S$109.1mn from the sale of the 10-storey commercial building, which was valued at S$266.7mn in June 2010. Market talk of a potential sale began as early as January 2010, when CCT received URA approval for the change of use of the property to residential (up to 80%). SLA approval for a lease extension to 99 years was subsequently received on July 13, 2010.

Rationale for Sale: Part of its strategy to free up capital by divesting assets that have reached the optimal stage in their life cycle, CCT cited the benefits of the sale as :1) realizing value significantly above valuation; 2) strengthening cash position and financial flexibility.

Investment thesis:. CCT is currently trading at 0.9x 2010e P/B, implied capital value of S$1,480psf, and we recommend investors accumulate the stock on any potential share price weakness.