CCT – DBSV

Ahead of market expectations

At a Glance

• Higher RCS contribution partially offset negative rental reversion, slightly ahead of consensus

• Healthy occupancy limited lease renewal for FY12

• Expect some interest savings, gearing at 30.2%

• Maintain BUY and S$1.36 TP

Comment on Results

Lifted by RCS. On a y-o-y basis, gross revenue and NPI fell marginally by 2.4% and 3.7% to $89.9m and $68.3m respectively. The steady performance was largely due to higher contribution from Raffles City Singapore (RCS). Consequently, DPU saw a marginal decline of 1% translating to DPU of 1.92cts including the S$1.1m retained income from RCS. Full year DPU exceeded consensus forecast by 5%. Book NAV rose by 3.3% as the trust took in a revaluation surplus of S$149.6m, with cap rates remaining at 4%.

Office occupancy dipped by 1.4ppt to 95.8%. Vacancies were largely coming from OGS (-4.2ppt) and 6 Battery Road (-5.6ppt). That said, the negative impact was mitigated as income from OGS is supported at a 4.25% NPI yield till July 2013, while the 93,700sf upgraded space at 6 Battery Road has been100% pre-committed. While negative rental reversion should still persist in 1H12, we believe the downside risk is mitigated with only 7.9% of its office leases by gross rental income in 2012 to renew.

RCS still performing well. RCS income rose 8.3% yoy and contributed about 34% of CCT’s FY11 income. Post completion of its AEI works, the retail and hotel revenues rose 13% yoy, while the hotel portion increased 7.9% on the back of strong tourist arrivals. Going forward, contribution from RCS should remain steady against the still healthy tourist arrivals and robust consumer spending backdrop.

Healthy balance sheet, some interest savings. Net gearing rose from 27.4% to 30.2% due to a drawdown of about $98m term loan for its 40% interest in the MSCP project. Separately, the trust has also secured funding for the S$570m term loan due in Mar at more attractive rates. Hence, we expect the 3.6% all-in- interest rate to head slightly down once the facilities are drawn down.

Recommendation

Maintain BUY. We continue to like CCT for its strong balance sheet and healthy cash reserve. While we believe sector headwinds persist, CCT is well placed to weather this given its low expiry profile and growing income from its non-office components. Our DCF-backed TP is lowered by 9.5% to S$1.36 as we roll forward our numbers and lower assumptions to account for the slower economy. The trust is offering FY12/13 DPU of 5.9-6.1%.