CapitaLand Commercial Trust - Asset reconstitution could be the big theme for 2016


■ Sponsor highlights ‘asset reconstitution’ opportunities during our visit

■ Golden Shoe Car Park redevelopment, Wilkie Edge sale could happen

Maintain Hold (3) rating and DDM target price of SGD1.38

What's new:
We had a meeting with the management of CCT’s sponsor CapitaLand (CAPL SP, SGD3.26, Hold [3]) on 8 December. The sponsor’s near-term outlook for the Singapore real estate market was subdued but it was more upbeat on the theme of asset reconstitution. We believe these opportunities reside squarely in CCT’s portfolio.

What's the impact:
Asset reconstitution broadly involves both redevelopment of existing assets and divestment of peripheral assets, and CCT appears to us to have prime candidates in both areas.

First, the Golden Shoe Car Park could be the next major property redevelopment opportunity (after CapitaGreen, CCT’s newly-completed office building which was also previously a carpark). CCT clarified in its announcement on 27 November that the property is not entirely wholly owned and that it is zoned as ‘transport facilities’, suggesting that the redevelopment would require approvals from various government entities and could be a protracted process.

The second opportunity, in this case a clean divestment, would be Wilkie Edge, a retail-office property in the Selegie area. The Singapore Business Times reported on 2 December that the property was being quietly marketed for sale by some property agents at an asking price of SGD1,800-2,000/sq ft (representing a corresponding netproperty income [NPI] yield of 3.5-3.1%) vs. the property’s 30 June 2015 appraised value of SGD1,266/sq ft (NPI yield of 5%).

We believe the realisation of any of these asset reconstitution opportunities would be positive for CCT, though the market reaction might be muted. We believe CCT would not lose much from the monetisation of Wilkie Edge at a highly favourable price, since it has always been a ‘peripheral asset’ (in our opinion) for CCT. The Golden Shoe Car Park redevelopment would be a long-term investment, but as long as the total IRR and yield on development cost are reasonable, it might be the best way for CCT to expand its Singapore portfolio further without having to overpay for assets.

Technical Analysis
Daily Chart
What we recommend:
We maintain our Hold (3) rating and DDM-derived 12-month target price of SGD1.38. We believe CCT is a standout among the office S-REITs for its low gearing and asset reconstitution opportunities. A positive risk would be positive leasing data for CapitaGreen and the rest of the portfolio while a negative risk would be the continuation of sharp QoQ declines in office rents in the coming quarters.

How we differ:
Our DPU forecasts for 2015-16E are in line with those of the Bloomberg consensus, but our 2017E is 4.5% below consensus because we expect a prolonged slump in office rents until end-2017 (for a peak to trough decline of 20% [from 1Q15 to 4Q17]). (Read Report)

Source : Daiwa Capital Markets

Labels: ,