CCT – CIMB

Distress valuations unwarranted

• Upgrade to Trading Buy from Underperform. YTD, CCT has been the worst performing S-REIT in our coverage, underperforming the STI and FSTREI by 15% and 20% respectively. Trading at 0.7x P/BV and offering DPU yields of 7%, we believe the market is valuing it at distress valuations, unjustified on account of its stronger balance sheet than the last crisis and the other S-REITs. Rental and occupancy downside (vs. the other office S-REITs) is also mitigated by NPI yield support from One George Street and its under-rented Capital Tower and HSBC Building. As such, while we lower our DDM target price to S$1.17 (discount rate 8.6%) from S$1.25 on 1-6% DPU reductions after cutting our rental and occupancy assumptions and while we retain our caution on the office sector, we upgrade CCT to Trading Buy, expecting re-rating catalysts from stronger-than-expected rentals and occupancy.

• Distress valuations unjustified. At current valuations, the market appears to be pricing its Grade A offices at capital values of S$1.4k psf and a cap rate of 7%, way below the S$1.7k psf for prime office assets during the last crisis.

• Unlikely to revisit previous trough. CCT hit a bottom of 0.2x P/BV during late 2008 to early 2009 on fears of dilutive cash calls after its asset leverage rose to finance the acquisition of One George Street in Jul 08 and on refinancing risks with debt maturing in 2009/10. With a much lower asset leverage of 27% now and more moderate sub-peak asset valuations and market rentals, we believe such trough valuations are unlikely to be revisited.