CCT – CIMB
Strong reversions expected
• FY06 within expectations. CCT’s DPU of 2cts for 4Q06 took full-year DPU to 7.3cts, vs. our forecast of 7.4cts and consensus expectations of 7.5cts. Gross rental revenue rose 89% yoy to S$56m in 4Q06, with growth mainly led by fullquarter contributions from Raffles City.
• Strong reversions to drive organic growth. All its properties remained almost fully occupied. About 24% of its office leases will be up for renewal this year and rates are likely to surprise on the upside. The latest lease at 6 Battery Road was signed at S$13 psf/month, with the asking rent reaching S$14 psf/month, vs. S$5-6 on average that its tenants are now paying. This was above expectations. We see CCT benefiting the most from strong office rent reversions in the next two years.
• Expanding in Malaysia and China. About 20% of CCT’s assets are likely to be in Malaysia and China by 2009. Quill Capita Trust (QUIL MK, RM1.33, NR), in which CCT has a 30% interest, will be the preferred vehicle for CCT’s expansion in Malaysia. The mode of investment in China is yet to be known but could be in the form of direct asset acquisitions or investments in a China-focused REIT, à la CMT’s (CT SP, S$3.24, NR) 20% stake in CRCT (CRCT SP, S$2.77, NR).
• We introduce our FY09 DPU estimate of 11.5cts, based on S$700m worth of acquisitions in 2009 taking CCT’s portfolio to S$5.9bn, a property yield of 3% for these acquisitions (40:60 debt-equity), and 34% and 23% of office leases up for renewal in 2008-09 respectively. We raise our FY07-08 DPU forecasts by 10-20% to reflect aggressive office rental reversions in the next two years.
• DDM target price accordingly raised to S$3.00 from S$2.55, still based on a cost of equity of 5%. Our FY07 DPU estimate of 9.5cts and target price of S$3.00 translate into a forward yield of 3.2%, in line with the CY06 yield that CCT has been trading at. Potential catalysts over the next 12 months could include asset enhancement plans for Raffles City, CCT’s move into China and possibly the trust’s maiden development project. Based on CCT’s latest assets of about S$3.8bn, we estimate CCT can undertake development projects worth S$380m. In light of the anticipated stronger DPU growth and favourable news flow, we upgrade our rating from Neutral to Outperform.