CCT – CIMB

Prospects bright but fairly valued

CCT posted 1Q14 revenue growth of 3.2% and DPU growth of 7.2% yoy. The topline and DPU account for 25% and 26% of our quarterly estimates, respectively. CCT’s next phase of growth is expected to be driven by the upcoming CapitaGreen, which is scheduled for completion in 4Q14. We lift our FY14 DPU estimate but tune down our FY15/16 forecasts by 3% to account for the slight dilution from the potential conversion of its CB due in FY15. We keep our Hold rating, but with a higher DDM-based (discount rate: 7.7%) target price of S$1.55 on the back of relatively good take-up for CapitaGreen which we believe will negate the potential dilution from the CB conversion.

Another stable quarter

CCT’s 1Q13 topline was S$64m (+3.2% yoy) while DPU was 2.1 Scts (+7.2% yoy). The growth in revenue was mainly attributed to higher revenue contribution from all the properties within its portfolio, with the exception of One George Street, which was affected by the cessation of income support. During the period, CapitaGreen (scheduled to be completed in 4Q14) secured pre-commitments for 12% of its total NLA of 700,000 sq ft, with an average rental rate of c.S$9 psf/mth. We believe CapitaGreen should be able to achieve a pre-commitment rate of c.60% prior to its completion in 4Q14, with an average rent of S$9.75 psf/mth. Portfolio occupancy for the quarter continued to creep up to 99.4% (vs. 98.7% a quarter ago).

Convertible bonds expected to be converted

Gearing stayed stable at 30.0% in 1Q14 (29.3% in 4Q13) while the average cost of debt dipped slightly to 2.4% (2.6% in 4Q13). Having completed all its FY14 financing needs, we believe CCT will continue to look at its refinancing needs for 2015 in the coming quarters. In our view, the S$190m CB due in FY15 (conversion price at S$1.23) is likely to be converted, in turn resulting in a DPU dilution of c.3.3%. Currently, with 80% of its total debt hedged as a fixed-rate debt, we believe CCT is fairly immune to any rate hikes.

Maintain Hold

Although we maintain a positive view on Singapore’s Grade-A office rental market, we believe CCT is currently fairly valued at 0.96x P/BV as it offers the lowest implied NPI yield of 3.1% vs. 3.5-6.2% for the office REIT space.