CCT – DBS

Within expectations

At a Glance

• 1Q10 results in line; positive yoy performance but slight dip qoq

• Office rents expected to have troughed but outlook on turnaround point mixed on large incoming supply

• Maintain Hold, TP at $1.23

Comment on Results

Within projections. CCT announced 1Q10 DPU of 1.93cts, up 19.1% yoy and +2.7% qoq, largely boosted by lower interest cost. The results were in line, representing 28% of our full year forecast. At NPI level, income fell 3% qoq to $77.6m on a 1.4% dip in revenue to $101.8m as well as a small hike in cost ratio. In terms of operations, occupancy rose marginally to 95.1% as CCT contracted or renewed 144373sf of leases with tenants from the banking and financial services, legal and real estate services sectors. As part of its capital management exercise, CCT also bought back $140.5m of its 2013 CBs, reducing the quantum to $229.5m.

Jury still out on office rent inflexion point. Management guided that demand for office space had improved and office rents may have reached a trough, although the timing and extent of recovery is still unclear due to the large 4.5m incoming supply. Our view is that office rents have reached a low and are likely to hover at the bottom until more of the new stock is digested. As a result, we expect negative reversions to kick in from 2H10 and 2011. This will put a drag on CCT’s earnings with 12% and 22% of its income due to be renewed this year and next.

Still awaiting asset review plan for Starhub Centre. Redevelopment of Starhub Centre is still awaiting govt approval. It has obtained outline permission to convert the building into a residential/ commercial property.

Hold call retained, TP $1.23. We believe share price catalyst could appear when the group announces further details on its portfolio review exercise, including acquisitions and plans for Starhub Centre. Balance sheet is healthy with gearing of 33.8% and debt maturity of 2.5 years. In the near term, DPU yields are expected to remain at 6.1-5.9% over FY10-11 on the moderated office outlook. Maintain Hold.