CCT – UOB Kay Hian
BACKGROUND
CapitaCommercial Trust (CCT) has the largest portfolio of prime office properties in Singapore, deriving about 72% of its value from this segment. Its portfolio also includes office and business park properties in Malaysia through a 30% stake in Quill Capital Trust (QCT) and a 7.4% stake in Malaysian Commercial Development Fund.
OUTLOOK/RECOMMENDATION
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Watch out for acquisitions.
- Portfolio reconstitution saw the sale of two office buildings, Robinson Point and StarHub Centre, in quick successions this year for a total of S$572.5m. Current gearing of 31.5% gives debt headroom of S$1b, assuming target gearing of 45%, for acquisitions. Management indicated it is on an active lookout for prime/Grade A office property in the CBD.
- Portfolio reconstitution saw the sale of two office buildings, Robinson Point and StarHub Centre, in quick successions this year for a total of S$572.5m. Current gearing of 31.5% gives debt headroom of S$1b, assuming target gearing of 45%, for acquisitions. Management indicated it is on an active lookout for prime/Grade A office property in the CBD.
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Strong pick-up in office rentals mitigates risk of negative reversion.
- The market rents for office space continued to improve in 3Q10 with prime office rents increasing 7.2% qoq to S$7.40psf pm and Grade A office rent increasing 6.5% qoq to S$9.00psf pm. The risk of negative rental reversions is mitigated with Grade A office rents exceeding the average portfolio rent of S$8.73psf pm and the prime office rentals bridging the gap to average portfolio rents. Average portfolio rent for CCT is S$8.79psf pm.
- The market rents for office space continued to improve in 3Q10 with prime office rents increasing 7.2% qoq to S$7.40psf pm and Grade A office rent increasing 6.5% qoq to S$9.00psf pm. The risk of negative rental reversions is mitigated with Grade A office rents exceeding the average portfolio rent of S$8.73psf pm and the prime office rentals bridging the gap to average portfolio rents. Average portfolio rent for CCT is S$8.79psf pm.
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Market Street carpark redevelopment.
- With prime office capital values increasing 29% ytd to S$2,000psf in 3Q10, outpacing a corresponding 9.6% rise in prime office rents to S$7.40, yield compression is starting to set in. With yield-accretive acquisition opportunities becoming increasingly difficult in the near term, management may relook the option to redevelop the Market Street carpark into an office building.
- With prime office capital values increasing 29% ytd to S$2,000psf in 3Q10, outpacing a corresponding 9.6% rise in prime office rents to S$7.40, yield compression is starting to set in. With yield-accretive acquisition opportunities becoming increasingly difficult in the near term, management may relook the option to redevelop the Market Street carpark into an office building.
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Maintain BUY and target price of S$1.70.
- We use the dividend discount model (required rate of return: 7.7%, terminal growth: 2.5%) to value CCT.
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