CapitaLand Commercial Trust - Buy: Weak office outlook is in the price

■ 9MFY15 results broadly in line with expectations

■ Diverse portfolio mix to provide stability; we see flattish reversions for the portfolio in the near term

Debt metrics remain robust; TP unchanged at SGD1.65; reiterate Buy rating

9MFY15 results broadly in line:
CCT reported 9MFY15 DPU of 6.5 SGD cents, in line with our and consensus expectations (75% of HSBC FY15e: 8.6 SGD cents and 74% of consensus FY15e: 8.7 SGD cents). Revenues at SGD206m (78% of HSBC FY15e: SGD265m and 76% of consensus FY15e: SGD272m), NPI at SGD160m (78% of HSBC FY15e: SGD207m) and distributable income at SGD190m (75% of HSBC FY15e: SGD254m) were all broadly in line. Our estimates are unchanged post results.

Diverse portfolio mix to provide stability:
CCT’s portfolio tenant mix remains diverse with 33% of gross rental income from banking, insurance and financial services (of which c52% is from large investment banks). While occupancy declined from 98.0% to 96.4%, this was largely on the back of the well-flagged lower occupancy at Capital Tower (from 100% of 92.2%) given the space vacated by Mizuho. On the other hand, committed occupancy at CapitaGreen increased to 85.5% as at end-3QFY15 and to 87.7% as at 27 Oct 2015 (from 80.4% in 2QFY15). We note, despite the decline, occupancy remains higher than CBRE core-CBD occupancy rate of 95.8%. Total leasing activity during the quarter was 226,000sf (retail space: 18,000sf), of which 36% were new leases with new demand supported by tenants from diverse trade sectors.

We see flattish reversions for the portfolio in the near term:
CBRE Grade-A office rents are SGD10.90 psf per month (3Q2015), down c4.4% from the 1Q2015 peak of SGD11.40 psf per month. With continued build-up of supply, we see spots rents declining c10% (peak-to-trough) and settling at cSGD10 psf per month over next 2-3 years. With limited office lease expiries over 2016-2018, and average expiring rents across CCT’s four major assets close to market (2016: SGD9.69psf per month; 2017: SGD10.26 psf per month), we see flattish reversions for the portfolio in the near term.

Technical Analysis
Daily Chart
Debt metrics remain robust; TP unchanged at SGD1.65; reiterate Buy:
Debt metrics remain robust with aggregate gearing at 30.1% – debt headroom of SGD1.3bn at 40% gearing – sufficient to fund the purchase of the portion of CapitaGreen that CCT currently does not own (cSGD940m). Our TP remains unchanged at SGD1.65, implying an upside of 15.0%. The stock’s current 25% discount to RNAV (vs. average of 4% discount since end-2010) and FY15e DPU yield of 5.9%, more than reflects the DPU growth outlook from a combination of flattish revenues (ex-acquisitions) and higher interest costs. Reiterate Buy. (Read Report)

Read Related Reports
1) Capitaland Commercial Trust - 9M15 in line: Portfolio occupancy dips to 96.4% by Credit Suisse Asia Pacific Equity Research, published on 29 October 2015

2) CapitaLand Commercial Trust - Positioning portfolio for weak outlook‏ by OCBC Investment Research, published on 29 October 2015

3) Capitaland Commercial Trust - A Pessimistic Outlook For CapitaGreen by RHB Research, published on 29 October 2015

4) Capitaland Commercial Trust - Proactive leasing activities by CIMB Research, published on 28 October 2015

5) Capitaland Commercial Trust - Performance in line, slow leasing progress for CapitaGreen by Daiwa Capital Markets, published on 28 October 2015

6) Capitaland Commercial Trust - Shoots of growth at Capitagreen by DBS Group Research, published on 28 October 2015

7) Capitaland Commercial Trust - No catalysts, but best-positioned by Maybank Kim Eng Research, published on 28 October 2015

Source : HSBC Global Research

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