CCT – CIMB
CCT to issue S$280m of convertible bonds
CCT issues bonds to fund acquisition and asset enhancement. CCT announced that it would issue no less than S$280m of bonds of 5-year maturity, convertible into new CCT units. CCT also has an over-allotment option to raise an additional S$90m, with the agreement of the underwriter Standard Chartered Bank, thereby raising the total proceeds to S$370m. Proceeds from the bond issue would go to refinancing their short term debt, working capital and partial financing of asset enhancement works and new acquisitions including One George Street.
Cost of bonds at 3.95%. The convertible bonds will bear interest at 2% per annum whilst its yield to maturity would be at 3.95% per annum. Holders of these bonds may convert the bonds into units between 21 May 2008 and 21 April 2013 at a conversion price of S$2.6762, or 23.9% above CCT’s closing share price of S$2.16 on 1 April 2008. If there is no redemption, conversion or cancellation, the convertible bonds would be redeemed at 110.66% of their principal amount, or S$311m on 6 May 2013.
Comments
Impact of convertible bonds (CB) issue in dilution scenario. The quantum of this CB issue is relatively small, amounting to only 24% of the S$1.165bn purchase price for One George Street. At the S$2.6762 conversion price, there would be an increase of 104.6m shares. Potential marginal dilution impact is marginal, on assumption of full conversion. If converted, 2009 DPU is lowered by 1.4% to 14.2cts (from 14.4cts) while 2010 DPU is lowered by 1.9% to 15.2cts (from 15.5cts). Conversion in the short term to be rather unlikely for now given that the conversion price is at a 25% premium to closing price of S$2.14 on 2 April 2008. In CCT’s trading history, stock traded above the conversion price only during Jan-Sep 07, hitting a high of S$3.26 when expectations of office rental escalation was more bullish. With new stock of office supply increasingly entering the market from 2010 onwards, we take the view that market expectations are unlikely to return to 1H07 levels. However, with the tight office situation currently, the conversion of this instrument cannot be totally ruled out. Our target price for CCT would decline by 1.7% to S$2.85 after incorporating full dilution from the CB.
Marginal improvement in DPU estimates in no dilution scenario. Without any impact from the potential dilution, we project a marginal 0.7% improvement in 2009 DPU estimates to 14.5cts and 0.6% increase in 2010 DPU estimates to 15.6cts. Our raised DPU estimates come as a result of the lower cost of funding (3.95%) versus our higher estimate of cost of debt (4.5%) assumptions previously. We have assumed that there would be no dilution in this convertible bond issue but have included the amortisation of interest on the convertible bonds.
Valuation and recommendation
Impact of bonds issue marginal, Maintain Outperform, target price raised to S$2.91. We reiterate our Outperform recommendation on CCT with a marginally higher target price at S$2.91, up from S$2.90 (discount rate at 6.6%) based on DDMderived valuation. This is based on the assumption that there would be no conversion to units prior to maturity of the convertible bonds in 2013. At its current price of S$2.14, CCT offers an attractive total return of 41% including a potential price upside of 36% to our target price of S$2.91 and a dividend yield of 4.8%.