CCT – MS

Shock Absorbers Not Required

Quick Comment: CCT is raising S$828.3mn via a 1-for-1 rights issue at an issue price of S$0.59/unit, priced at a 44% discount to its last closing price of S$1.06. The move to raise equity is in line with our expectations, whereby with the current asset devaluation cycle, S-REITs would be pressured to reduce their leverage by retiring outstanding debt. The 29% absolute performance of the stock in the last month presented management with an opportunity to raise equity in the market. CCT is the third-largest S-REIT to raise equity in the market after CMT and A-REIT. Similar to CMT’s case, CapitaLand is commitment in taking up its entitlement to maintain its 31.4% stake in CCT. We maintain our view that for 2009, we see the S-REITs as better investments within the Singapore property space. CCT remains our sector top pick given its high dividend yield of 7.3% post the equity raising.

Asset devaluation gaining pace, 2009 still bearable: CCT’s recent asset revaluation has led to a 10% decline (S$681mn) in asset values from the valuation done in December 2008. Based on our estimates, the asset decline effectively raises CCT’s leverage from 37% to 41%, the higher band of management’s target leverage level of 30-45%. Approximately S$760mn of the gross proceeds would be used to partially retire its debt due in 2010, which would reduce CCT’s leverage from 41% to 36% and even 28% for F2009-10 assuming no further asset devaluations from current levels. According to CCT, the May revaluation was lower due to valuers’ imputing office rental declines through to 2012 while maintaining the same level of cap rates as the December valuation (Office: 4.5-4.75%, Retail: 5.5%, Raffles City: 5.6%, Hotel: 5.85%). However, we maintain our view that with total costs of debt currently at 4.5-4.75%, at best, cap rates are likely to expand further. Applying cap rates of 6% and 7% for office and retail, respectively, to our 2009 average rents estimate for its portfolio, another 25% decline in asset values or S$1.5bn is possible, in our view, raising leverage to 46%, which is a risk in 2010,