CCT – DMG

Good Quarter But Not Without Concern

FY12 earnings in line with expectations. CapitaCommercial Trust (CCT) reported its FY12 results with a DPU of 8.04S¢ (+6.9% YoY); largely inline with our estimate of 8.02S¢. Revenue and net property income for the period came in at S$375.8m (+4.0% YoY) and S$295.5m (+6.6% YoY) respectively. Distributable income came in at S$228.5m (+7.4% YoY); mainly attributable to revenue contribution from the acquisition of Twenty Anson and higher rental income from HSBC Building. These results are generally respectable as 2012 has proven to be a challenging market for the office sector. However, the increase in income support, particularly for One George Street, remains a concern as it rises to S$4.2m in 4Q12 (vs S$2.2m 4Q11). Going forward, although CCT’s portfolio is expected to benefit from positive rental reversion, as 28.8% of NLA is due for renewal in FY13, the expiry of income support at One George Street in July 2013 proves to be a concern in the short term. With a forecasted FY13 dividend yield of 4.7% at current share price, we have downgraded our rating on CCT to Neutral with a slightly tuned down DDM based (COE: 8.0%; TGR: 1.0%) TP of S$1.70.

Concern on the ending of income support for One George Street. During 4Q12, it was noted that the income support for One George Street amounted to S$4.2m (S$18.1m for FY12) vs S$2.2m for 4Q11 (S$5.0m for FY11). This was mainly attributed to negative rental reversion in this property coupled with the moving out of several tenants over the year (committed occupancy for this building was 92.5% in 4Q12). As the income support is due to expire in July 2013, the relatively low occupancy and negative rental reversion posts to be a key uncertainty in our valuation of CCT. In view of this, we have tuned down our FY13 DPU estimate by c.1.5% to justify for a probable weaker 2H13.

Well positioned to enjoy positive rental reversion in FY13. Going forward, we believe CCT will remain largely stable on the back of additional contribution from Twenty Anson and positive rental reversion from leases that will expire in 2013 (26.2% of gross rental income). Currently, CCT’s average passing rent for the leases to expire in FY13 is at S$7.64 psf/mth. As compared to the market rate of S$9.58 psf/mth, we believe CCT is currently well positioned to capture potential rental upside when its leases expire in FY13.

Downgrade to NEUTRAL with lower TP of S$1.70. As CCT currently trades at a forecasted FY13 dividend yield of 4.7%, coupled with a possible weaker 2H13 on the back of the upcoming lost in income support as highlighted above, we have downgraded our rating on this counter to NEUTRAL with a slightly tuned down DDM-based TP of S$1.70.