CCT – CIMB

Bear rally still has legs

• Doomsday scenario: office rents fall to S$2.40psf. We stress-test our model for CCT assuming that average prime office rents in the market will fall by 60% over 2009-10, reaching S$2.40psf in 2010, or 40% below the S$4psf in the last trough. This would drive DPU declines of 5% in 2009 and 27% in 2010. Our target price also falls about 30% from S$1.17 to S$0.81.

• Buffer for CCT. Although the negative macro environment and large impending new supply bode ill for office rents and occupancy levels, we believe that any negative impact on CCT would be mitigated by: 1) low portfolio average rents of S$7psf/month vs. the market average of S$16psf/month; 2) long weighted average lease terms to expiry of 6.7 years for its top 10 tenants, more than twice the typical commercial lease term of three years; 3) rental caps and long lease options for its GLC tenants (in Capital Tower and Raffles City); and 4) 5-year income support for One George Street by CapitaLand.

• Maintain Outperform with lower target price of S$1.08 (from S$1.17), still based on DDM. We refine our assumptions, now assuming flat average portfolio rents vs. our earlier assumption of 1.3% growth from 2009. Our DPU estimates have been trimmed by 1.4-2.7% for FY09-10. Despite its recent price rally, CCT remains the cheapest REIT under our coverage at 0.29x P/NAV with forward yields of 12%.