CCT – CIMB

Strong but upside capped

Although we expect the office market to improve from here, with only 13% of its office space due for renewal next year, CCT’s upside is likely to be capped, particularly with a lack of acquisition targets.

3Q13 results are in line, with DPU accounting for 26% of our full-year forecast and 9M13 DPU at 76%. In view of a lack of meaningful near-term growth catalysts, we remain Neutral with an unchanged DDM-based target price (discount rate 7.9%).

Active quarter in leasing

During the quarter, CCT largely concluded its long-term lease to CapitaLand Limited at Capital Tower. Together with 40,000 sq ft of space in advanced negotiations with one of CapitaLand’s business units, Capital Tower’s committed occupancy will reach 100%. In addition, CCT signed new leases and renewals for c.347,000 sq ft of space during the quarter. With these, all leases that are due for renewal in FY13 have been renewed. Further out, CCT has 13% and 30% of space (by monthly gross rental income) due for renewal in FY14 and FY15 respectively.

Strong balance sheet

Gearing was up a notch this quarter to 29.5% (28.9% in 2Q13), while average cost of debt dipped to 2.7% (2.8% in 2Q13). Having completed its refinancing last month, CCT will have no refinancing needs until 2015. With 75% of its total debt hedged as fixed-rate debt, we believe CCT is fairly immune to any rate hikes. We estimate a 1% impact on its DPU from a 50bhp increase in cost of borrowing.

Limited upside

Although fundamentals remain solid, we believe upside for this stock is limited, from a lack of meaningful growth catalysts. In addition, convertible bonds due in 2015 (outstanding S$190m) remain an overhang.