CapitaLand Commercial Trust: Divestment of One George Street – at 16.7% above valuation May 3, 2017

PSR Recommendation: NEUTRALStatus: MaintainedTarget Price: 1.63
  • Divesting 50% of One George Street (OGS) for S$591.6mn, 16.7% above 31 Dec 2016 valuation (or 1.6% above purchase price in 2008).
  • Estimated net gain of S$79.7mn after transaction costs.
  • Proceeds likely to be used for Golden Shoe Car Park redevelopment.

What do we think of the news?

  • Divesting OGS into separate entity OGS LLP for S$1,183.2mn, 16.7% above latest valuationCCT will retain 50% ownership of the above OGS LLP, effectively divesting 50% of OGS to insurer FWD Group for S$591.6mn, reaping an estimated net gain of S$79.7mn after transaction costs. CCT purchased OGS for a total sum of S$1,165mn in 2008 from CapitaLand using 100% debt. The sale price is 16.7% above latest valuation and 1.6% above CCT’s 2008 pro-rated purchase price.
  • Proceeds expected to be eventually used for Golden Shoe Car Park (GSCP) redevelopment. CCT’s pending redevelopment of Golden Shoe Carpark into a new office tower that could yield c.1mn sq.ft of commercial space will require significant capital outlay. Using CapitaGreen’s average development cost of c.S1,800psf/NLA as a gauge, the total redevelopment cost for GSCP’s redevelopment could come close to S$1.8bn-S$2bn. Proceeds for the sale of OGS is expected to be eventually redeployed into the redevelopment of GSCP, minimizing the need for further debt/equity fund raising.
  • Expect lower y-o-y DPU for FY17 and FY18 with the divestment. Capital redeployed will take time to bear fruit. CCT went through a similar process of “capital recycling” in 2010/2011 when the manager divested Robinson Point and StarHub Centre in 2010 and redeployed the capital eventually for the redevelopment of Market Street Cap Park. 2011 saw a 4% y-o-y drop in DPU following the divestments. While the redevelopment of GSCP is expected to boost earnings, the project is not expected to complete until 2021. We expect a 3.9% y-o-y drop in DPU for FY17 to SG 8.7c following the divestment of OGS.

Investment Actions

Following the divestment, we expect FY17e and FY18e DPU to fall 3.9% and 7.2% y-o-y. The potential re-deployment of capital into funding growth opportunities such as the GSCP redevelopment would provide a boost in earnings post completion as evidenced by the previous successful capital recycling efforts seen in 2010 and 2011. In view of this, we revise our terminal growth upwards to 1.85% from 1.3%. We maintain our “NEUTRAL” call on CCT with an unchanged DDM-derived target price of S$1.63

Figures 1 and 2: CCT trades at close to post GFC average dividend yields but above average Price/NAV

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Figure 3: Peer comparison table

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About the author

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Tan Dehong
Investment Analyst
Phillip Securities Research Pte Ltd

Dehong covers primarily the REITs and property developer sector. He has close to 7 years experience in equities related dealing and research roles.

He graduated with a Masters of Science in Applied Finance from SMU and Bachelors of Accountancy from NTU.

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