CCT – AmFraser

Growth delivered, as expected. CCT’s FY14 results came in within expectations, as full-yearDPU rose by 3.9% YoY to 8.46 cents, led mainly by stronger contributions at Capital Tower and Six Battery Road. While we expect more growth ahead with CapitaGreen (CG) coming online, we believe CCT is fairly-valued and its FY15F DPU yield of 4.6%is relatively uncompelling. Maintain HOLD and TP of S$1.76.

Capitalising well on tight market. CCT’s portfolio occupancy was robust at 96.8% as at 4Q14. Excluding the recently completed CG, its office properties operate at occupancies in excess of 97%. Capital Tower and Six Battery Road saw their revenues increase by 8.8% and 12.8% YoY respectively, offsetting the 5.8% decline at One George Street due to the cessation of its yield protection in July 2013.

CapitaGreen leasing demand beat expectations. As at Dec 2014, CG achieved a commitment rate of 69.3%, exceeding management’s target of 50%. To minimize potential impact when the wave of new Grade A office supply hits the market in 2016, most tenants at CG have been signed on leases longer than three years, with 91% (by gross rental income) of the committed leases expiring only in 2019 and beyond. Management expects CG to contribute meaningfully to Distributable Income only in FY16, as tenants progressively move into the property.

Not if, but when. CCT has a call option to acquire the remaining 60% stake in CG from its JV partners, CapitaLand and Mitsubishi Estate. The option is valid for three years starting from Dec 2014 with the completion of the property and will be priced at market valuation. CCT has debt headroom of S$1.3b assuming 40% gearing, which will cover the cost of the potential acquisition. We reckon that CCT will trigger the option only when the property’s occupancy rate exceeds 95% to minimize the need for income support.

Fairly valued, maintain HOLD. We like CCT’s sound capital management, with a low gearing of 29.3% and 83% of its borrowings are on fixed rates which minimizes uncertainty when interest rates rise. However, valuations are no longer compelling with FY15F DPU yield expected to be merely 4.6%. Our DDMderived TP remains unchanged at S$1.76.