CCT – DBSV

Looking for growth catalysts

• Full year DPU of 8.04 cts in line with expectations
  
• Steady occupancy, positive rental reversion, higher contributions from 6 Battery Road to drive FY13 earning.
  
• Low gearing and strong balance sheet can be used to drive inorganic growth
  
• Maintain HOLD at a higher TP of S$1.54
  

Highlights

In-line results. On a year-on-year basis, gross revenue and NPI rose by 8.0% and 1.6% respectively. The uplift in income was driven by the higher revenue from HSBC Building, the additional contribution from Twenty Anson and the higher income support from One George Street (OGS). NPI margin held steady at 77% as nonrecurring property tax refunds offset higher operating costs. DPU came in at 2.05cts, representing a +6.8% after retaining the $0.2m tax exempt income from QCT. NAV rose 2.5% to $1.62 upon a revaluation gain of S$154m. This largely led by cap rate compression of 25bbp to 3.75% -4.25% for its offices, alongside more moderated rental assumptions, resulting in a revaluation gain of S$154m.

Our View

Moving in the right direction. Occupancy continued to hold steady at 97.2% with average portfolio monthly rents moving up to S$7.64 psf from S$7.53 psf a quarter ago. Positive rental reversion is expected to continue as the average monthly rents for the 26.2% (gross rental income) leases expiring this year are at S$7.44 psf – S$7.53 psf vs Grade A market rents of S$9.58psf. Pre-commitments at 6 battery road are coming in strong. 91% and 86% of the 200,000 sf of space completed in 2012 and the final 171,000 sf scheduled for upgrading works in 2013 have been taken up respectively. Meanwhile, OGS’s occupancy held up pretty well at 92.5% despite the exit of a few large tenants. Underlying rents of S$8.50 – $9.50 psf have moved up closer to the income support rents of S$11.20 psf, which partly mitigate the income vacuum post the expiry of income support in July 2013.

Prudent capital structure. Gearing remains low at 30.9% and the trust only has about $50m or 2% of its debt due for refinancing in 2013. That would give the trust up to S$1b debt headroom (40% gearing) to undertake AEI work for some of its older projects or to capture accretive acquisition potential.

Recommendation

Maintain HOLD. We have nudged upwards our TP and FY13/14DPU by 3% to adjust for the better rents achieved at HSBC. Upside risk will hinge on potential accretive acquisitions or better-than-expected leasing performance at CapitaGreen and OGS