CCT – MS

Starhub Centre Sold for S$109mn Gain; N/T Positive

Quick Comment: We maintain our Overweight rating on CapitaCommercial Trust (CCT) and see the recent profitable sale of Starhub Centre as providing near-term support for the stock. While the recent strong stock price performance of +13% in the last month (vs. +4% for the STI) no longer leaves valuation looking as attractive, news flow in the office sector should remain positive as we increasingly hear of rising rents and stronger office demand for 2010. We estimate a potential impact on NAV of +5%, and impact of forgone future rentals on DPU could be as much as -1%/-5%/-4% in 2010E/11E/12E (Ex. 1). With capital values already on the uptrend (Ex.3), we think the potential for accretive acquisitions to be limited in the current environment. Hence, to avoid the drag of excess cash, we think the sizable proceeds could be: 1) distributed to shareholders – potentially S$0.13 per share, 11% of the current stock price; or 2) used to reduce debt and interest expense – up to 4% addition to DPU (Ex. 2).

What’s new: CCT announced the sale of Starhub Centre to Frasers Centrepoint for S$380mn (net: S$375.8mn), expected to complete on September 16, 2010. CCT gains S$109.1mn from the sale of the 10-storey commercial building, which was valued at S$266.7mn in June 2010. Market talk of a potential sale began as early as January 2010, when CCT received URA approval for the change of use of the property to residential (up to 80%). SLA approval for a lease extension to 99 years was subsequently received on July 13, 2010.

Rationale for Sale: Part of its strategy to free up capital by divesting assets that have reached the optimal stage in their life cycle, CCT cited the benefits of the sale as :1) realizing value significantly above valuation; 2) strengthening cash position and financial flexibility.

Investment thesis:. CCT is currently trading at 0.9x 2010e P/B, implied capital value of S$1,480psf, and we recommend investors accumulate the stock on any potential share price weakness.