CCT – DBS

Steady growth

Story: CCT’s 23% yoy jump in Q2 distribution income to $36.1m was in line with expectations. This was achieved through a 25% rise in revenue to $74.4m on the back of strong organic rental growth. NPI increased by a slightly lower 19% to $51.5m, eroded by higher property taxes. On a qoq basis, bottomline rose a modest 0.6%, despite a 4.5% hike in topline due to higher interest expense. The group revalued its properties by an average 9% to $5.6b, translating to a book NAV of $3.07.

Point: With portfolio occupancy at a high 99%, the uplift to bottomline came largely from positive rental reversions across its buildings. About 10.7% of portfolio office space was renewed in 1H08 at rents 193% above preceeding levels while retail rents were up 52% over previous rates. For eg, leases at 6 Battery Rd were contracted at $21.6psf/mth while at Robinson Pt, rents reached $12psf/mth. Looking ahead, we believe the pace of office rental growth is likely to moderate in 2008 given the slower global economic growth. Nonetheless, CCT should still enjoy positive earnings growth given the significant spreads between average passing and new rents and the tight near term supply of prime office space. 2H08 earnings will be driven by organic growth as well as new contributions from One George St (OGS). CCT has a remaining 3% and 2% of office and retail space respectively to be renewed. Going into 2009-10, an estimated 26% of office and 16% of retail space is up for reversions.

Relevance: We have tweaked our FY08 and FY09 DPU up slightly to 10.5cts and 12.2cts respectively. Our price target is adjusted down to $2.23 based on higher risk free rate assumption of 3.9%. The stock is currently trading at 0.6x P/Bk NAV and is offering DPU yields of 5.3% and 6.2% respectively over FY08-09.