CCT – DBSV

Redeveloping Market Street Carpark

• Results within street estimates, negative rental reversion kicking in

• Redevelopment of Market Street Carpark provide midterm boost

• Upgrade to BUY with slightly higher TP of $1.59

1Q11 results within expectations. Topline declined by 10.6% yoy and 2.4% qoq to $91m, due to lower revenue contribution from 6 Battery Rd following asset enhancement works as well as negative rent reversions and income vacuum left by the disposal of Starhub Centre and Robinson Point last year. Correspondingly, NPI fell by 9.9% yoy (-1.4% qoq) to S$69.9m. Distributable income dipped a smaller 4.7% yoy to S$52.1m (DPU: 1.84Scts) due to lower borrowing cost.

Negative rental renewals mitigated by healthy leasing activities. Portfolio occupancy remained relatively stable at 98.2% (-1.1% qoq) with the group signing 156,000sf of new office and retail leases in 1Q11. That said, topline will continue to be affected by negative rental reversions for the rest of 2011 with expiring office leases in its 4 major buildings averaging $14.01psf/mth, compared to current market rates of c$8.5-12psf. CCT has a remaining 10.3% of office and 2.1% of retail leases up for renewal in 2011 and another 13% and 6% respectively by 2012.

Redeveloping Market St Carpark gives better returns. The group announced it is jointly redeveloping the Market St Carpark into an office tower with Capitaland and will take a 40% share in the $1.4b project. We believe the projected 6% yield on cost is more accretive than acquiring completed properties at this part of the cycle. Taking into account its share of $560m capital commitments, we expect gearing to remain healthy at c31% when completed. Redevelopment will cut bottomline by 2-4% over FY11-14 on loss of income to DPU yield of 4.7-4.8%. However, earnings will rise by a healthy 24% yoy in FY15 when the development is completed. More importantly, we believe this exercise would be ROE enhancing and lift current BV by 5% based on mark to market value of c$2600psf.

Upgrade to Buy. We upgrade the stock to Buy as we expect this redevelopment to provide share price re-rating catalyst. Our TP is raised slightly to $1.59 and offers 18% total return.