CapitaLand Commercial Trust – Attractive valuations for a stable portfolio May 5, 2020 354

PSR Recommendation: ACCUMULATE Status: Upgraded
Last Close Price: S$1.75 Target Price: S$1.736
  • 1Q20 revenue was in line, DPU of 1.65cents came in lower, at 18.3% of FY20e DPU, due to retention of distributable income in anticipation of cashflow disruptions from rental deferment.
  • Upgrade to ACCUMULATE, with TP of $1.74 (prev $2.18). FY20e DPU was cut by 15% from 9.03cents to 7.67cents, representing a yield of 5%. Cost of equity was increased from 6.34% to 7.25% and beta was raised by 13bps to reflect higher market risk and lower our terminal growth assumption from 1.85% to 1.6% to factor in weaker leasing demand.

 

The Positives

+ c.10% of lease expiries for the year remain, 60% of FY20’s expiries committed. CCT signed approx. 303K sqft of leases in 1Q20 with positive reversions ranging 0% to 31%. 22% of leases signed were new leases with demand coming from Financial Services, Legal Energy, Commodities, Maritime and Logistic sectors. With weaker economic sentiments, leasing demand is expected to be muted, with more renewals than new leases expected.

 

The Negatives

– Portfolio occupancy fell from 98.0% to 95.2%. This was largely attributed to lower occupancy at Six Battery Road (-20.2ppts from 98.7% to 78.5%) due to AEIs following the anchor tenant’s (Standard Charted) downsizing upon lease expiry in January 2020. Occupancy at Raffles City Tower also fell by 5ppts QoQ from 97.2% to 92.2%.

 

Outlook

CCT will be passing on property tax rebates at the respective rates to all their tenants; Retail and F&B tenants (mostly under RCS) will be receiving approximately 2 months of rental rebates (property tax rebate inclusive). RCS will waive turnover rent for the hotel operators for the month of April (variable rent accounted for 22% of rents from hotels operators in FY19).

Two properties will be undergoing AEIs in FY20 – partial closure of Six Battery Road after and full closure of 21 Collyer Quay after the end of HSBC’s lease in April 2020. Capex costs expected to be $35mn and $45mn respectively.

 

Upgrade to ACCUMULATE with lower TP of S$1.74 (prev. $2.18).

We lower our FY20e/21e forecasts to factor in lower occupancy from weaker demand in the near-term and the lower revenue from RCS due to the tenant support initiatives. FY20e/21e DPU was lowered by 15.0% and 10.9% respectively. Our cost of equity is raised from 6.34% to 7.25% after raising our beta by 13bps and lowering our terminal growth assumption from 1.85% to 1.6% to factor in the increased market risk and weaker leasing demand.

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Natalie Ong
Research Analyst
Phillip Securities Research

Natalie covers the REITs and Property sector. Previously a business analyst with a management consultancy, she handled feasibility studies and business optimisation and restructuring projects. She has worked with companies from varied industries including logistics, FinTech, EduTech, gaming, F&B and retail. She graduated with a Bachelor of Science (Honours) in Banking & Finance from the University of London.

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