CCT – CIMB

Rising from the ashes

• Top pick in commercial sector, upgrade to Outperform from Underperform. CCT is the largest REIT office landlord with almost 3.5m sf of commercial space. Even with asset devaluation, the likelihood of breaching impairment levels is limited. To reach impairment, CCT’s assets would have to be devalued by 40% over a single year. Assuming a 20% devaluation, CCT would still remain within 45% gearing, which is the optimal level. With management’s track record in past refinancing and access to debt markets, as well as support from sponsor CapitaLand, we believe that it should be able to secure refinancing.

• Concerns already priced in. We have priced in occupancy levels falling to the last crisis levels but with moderate rental declines in view of CCT’s resilient income from 5-year minimum income support for One George Street, long leases for HSBC Building and a stable retail segment in Raffles City. We also increased our cost of debt to 5%, 140bp above its current all-in cost of debt of 3.6%. Despite this, forward yields for CCT remain attractive at 11% for a portfolio of its quality.

• Unchanged DDM-derived target price of S$1.17 (discount rate 10.4%). At our target price of S$1.17, CCT has potential price upside of 30%, vs. the potential 15% upside for the STI. We upgrade CCT to Outperform from Underperform based on valuation. The sharp fall in its share price has more than compensated for various concerns, in our opinion. Early success in securing refinancing before Mar 09 may provide a catalyst for the stock. At 0.29x price to NAV, CCT is the second-lowest valued REIT after FCOT (0.21x). We believe this is an opportune time to accumulate the stock at such attractive levels.