CCT – DBS
Out of the picture
1Q07 in line, kick starting AEI for Raffles City. CCT announced 1Q07 DPU of 2.11 cents, which translates to an annualised yield of 3.1%, within expectations. Along with 1Q07 results, CCT also announced plans for phase 1 of asset enhancement works at Raffles City, creating an additional 41,000 sf of retail NLA. We expect Raffles City to progressively roll out AEI initiatives over a 2-3 year time frame and add another 150,000 sf of retail space, which we have factored into our projections.
Out of the picture for Capitaland’s Singapore assets. Following the sale of 12 floors of Springleaf Tower to MGPA for S$1,240 psf and 9 floors of Samsung Hub to Ho Bee and Chinese Chamber Realty for S$1,388 psf by Capitaland, we note from brokers that recent billion dollar transaction of the sale of Temasek Tower to MGPA at S$1,550 psf was yielding below 3%, against CCT’s current yield of 3.1%. While we recognize CCT could leverage on Capitaland’s network to source for acquisitions, CCT is passing out on office transactions with parent Capitaland cherry picking for the best deals in town. Low transacted physical yields are pricing CCT out of the market with competition from property funds that have more flexibility and less stringent regulations on investment and access to funds.
Positive reversions remain primary source of growth. Moving forward, we continue to see broad based rental recovery of the office sector, with both Grade A and prime office rents showing sequential growth 10.1% and 21.4% respectively for 1Q07, keeping up the bullish momentum into 2007. We expect DPU growth of 17% and 29% respectively for FY07 and FY08 to be mainly driven by strong reversions from CCT’s portfolio of office assets with 50% of leases up for renewal over the next two years, highlighted by asking rents for 6 Battery Road already hitting S$16 psf pm.
Maintain Hold, TP S$ 2.97. We are raising our DCF based target price from S$2.64 to S$ 2.97, factoring in higher reversion rents for CCT’s portfolio. While its 30% strategic stake in Quill Capita Trust (QCT) provides an additional platform for growth into the Malaysian market, we see minimum impact for CCT in the near term. Upside risks to our recommendation include acquisitions from both asset injections by Capitaland as well as 3rd party acquisitions, of which CCT has been quiet since the HSBC acquisition in 2Q05.