CCT – DMG
Outlook remains challenging
Raising our target price to S$0.87 from S$0.73. Our DDM-backed target price reflects a lower cost-of-equity assumption of 9.1% (10.2% previously). We reduced our risk free rate assumption by 50bps to 2.5%. CMT will be reporting 3Q09 results on 21 Oct and we expect annualised DPU of 6.29¢, a 42.8% decline over FY08. The decline in DPU is attributed to the rights adjustment. Maintain SELL.
Negative rental reversion expected. CCT’s portfolio rents of S$8.14/sqft are above 3Q09 spot rates of S$7.50/sqft. Our channel checks indicate that some landlords in prime areas are currently negotiating rents at between S$6-7/sqft, 20% lower than 3Q09 figures. Despite the economy being technically out of a recession, it is clearly still a tenants’ market and the focus on tenant retention remains paramount for all landlords including CCT. In our view, most office landlords will likely shift their focus on occupancy optimisation at the expense of rental rates, putting further pressure on rents in the coming quarters.
Formidable supply before mid-2011. Over the next 20 months, there will be six major properties due to TOP in the Raffles Place vicinity, out of which, only one (MBFC Tower 1) has been fully pre-leased. The remaining five properties constitute 3.4m sqft of leasable area, many of which will be subjects of premarketing between now, through to mid-2011. In the coming months, landlords of these properties will almost certainly be scrambling to put forward highly competitive rates, a scenario that could further dampen the already fragile rental market. We believe CCT could feel the biggest impact considering that 1) its expiring rents at 6 Battery Road building are S$12.4/sqft for 2010 and S$16.2/sqft for 2011; 2) $7.1/sqft for Capital Tower in 2010; 3) S$10.4/sqft for Raffles City Tower in 2010; and 4) S$12.4 for One George Street in 2011.
Cautious on office sector. At current prices, CCT offers investors a dividend yield of 6.3% for FY10, compared to its historical yield of 5.7% between 2005 and 2007. We view risk-returns on the counter as unfavourable and recommend investors to sell into strength. Our recommendation is also predicated on the subdued earnings visibility within the office space.