CCT – OCBC

Rising anticipation of Starhub Centre sale

Closer to selling StarHub Centre? Business Times reported late last month that CapitaCommercial Trust (CCT) could be close to selling StarHub Centre. GuocoLand and Frasers Centrepoint group were said to have participated in the expression of interest exercise. CCT has already obtained outline planning permission from URA to redevelop StarHub Centre into a residential (capped at 80% of GFA) and commercial property but has yet to receive approval from SLA for the lease of the site to be reset to 99 years. CCT is still evaluating all options with regard to the asset plan for StarHub Centre and no decision has been made yet.

Share price outperformed since the news report. Based on our earlier estimates, we believe that StarHub Centre could fetch between S$301.2m and S$361.9m if the buyer intends to redevelop it into a residential/commercial property. This would translate to a gain of S$33.2m (S$0.01 per share) to S$93.9m (S$0.03 per share) over its last appraised value of S$268m at the end of FY09. Since the report was published on Business Times on 24 Jun, the price of CCT gained 4.2%, outperforming its closest peer, K-REIT (up 1.8%), and the FTSE ST REIT index (up 1.2%) over the same period. We believe that the market is already anticipating the divestment of StarHub Centre in the near future.

Reinvestment of proceeds an uncertainty. Even though CCT could make a one-off gain from the divestment of StarHub Centre, DPU will be affected by the loss of income stream from StarHub Centre, which constitutes ~5% of CCT’s FY09 Net Property Income (NPI). And with CCT’s realigning its focus on Grade A office building investments, there is no assurance of a quick reinvestment of the divestment proceeds in incomegenerating assets at attractive prices to replace the loss income from StarHub Centre.

Downgrade to HOLD on valuation. With its 3Q10 results just around the corner, we are keeping our estimates unchanged for now. Our fair value remains at S$1.26, which is pegged at parity to our RNAV. Current share price of S$1.23 translates to an upside potential of 2% and with an estimated FY10 DPU yield of 5.9%, our projected FY10 total return for CCT is now 7.9%. With a lower upside potential now, we are downgrading CCT to HOLD on valuation ground. We also note that operationally, rental growth is still a concern, given the upcoming supply of new office spaces.