CCT – CIMB

Rich Valuations

4Q12 remained an active quarter of leasing for CCT. In 2013, all eyes are likely to rest on One George Street with the expiry of yield support and departure of major tenant, Wong Partnership in mid-2013. We view CCT’s current valuations as stretched.

4Q12/FY12 DPUs met our and market expectations, at 26%/101% of our full-year forecast. Factoring in 4Q12, we tweak DPUs but keep our DDM-based target price (discount rate: 7.3%) unchanged. We maintain an Underperform on valuations and uncertainty after income support falls off.

Steady leasing

We expect FY13 DPU to be flat as positive rental reversions and potential interest cost savings (with the expiry of a high-cost interest rate swap) mitigate downside from downtime on back-filling and expiry of income support at One George Street. 4Q12 DPU was up 7% yoy on higher contributions from HSBC Building and 20 Anson.

Management remained active in leasing in 4Q, signing 140,000sf of leases. Demand was still mainly from smaller and mid-sized non-financial tenants. With back-filling, occupancy inched up to 97.2% from 97.1% last quarter. Management is targeting an estimated 171k sf of space (86% pre-committed) for upgrading at Six Battery Road. All eyes this year are likely to rest on One George Street with the expiry of yield support (passing rents of S$8+ psf vs. support rents of S$11.5psf) and impending departure of major tenant Wong Partnership in mid-2013.

Lower cap rates

CCT’s asset portfolio was revalued upwards by S$129m (+3%) as a 25bp cap rate compression on its Grade A offices offset lower forward rental projections. Office assets are now valued at 3.75-4.25% cap rates.

Maintain Underperform

Given the flattish DPU outlook and uncertainty with the fall-off in yield support, we see valuations stretched at 1.1x P/BV and forward yields of 4.8%. Upside could also be capped by its two tranches of convertible bonds due 2015 and 2017 which are already in the money, at S$1.23/ shr and S$1.64/shr, respectively.