Capitacommercial Trust - DPU uplift from MSCP to come later (CIMB)

UNDERPERFORM Maintained

S$1.46 Target: S$1.46

Mkt.Cap: S$4,129m/US$3,390m

• Negative reversions for rest of 2011; maintain Underperform. 2Q11 results met expectations, at 25% of our FY11 forecast and consensus estimate. Despite a 15bp cap-rate compression for its Grade-A assets, operational indicators continued to decline with revenue down 9.2% yoy on negative rental reversions from 6BR and OGS. This trend is expected to persist in 2H11 with expiring leases locked in at peak levels in 2008. Plans for MSCP redevelopment have been finalised with CCT potentially gaining full stakes by 2015. However, the DPU uplift is also not expected until then. We raise our DDM-based target price by 7% to S$1.46 (8% discount rate) to account for this. Maintain Underperform on valuations (1x P/BV), with limited near-term catalysts in sight for organic growth in the next 6-12 months.

• Renewal rents in 2011 locked at peak levels. Cap rates for CCT’s Grade-A assets (Cap Tower and OGS) fell from 4.15% to 4%, resulting in a S$145m revaluation gain for 2Q11. Operationally though, gross revenue continued to trend down by 9.2% yoy, primarily from negative rental reversions for 6BR and OGS and lost rental income from earlier disposals. Debt headroom is ample for acquisition growth, but the likely lack of immediately DPU-accretive assets for purchase is evident given physical cap rates of 3-4%. 6BR which makes up 20% of CCT’s rental income, with average expiring rents this year locked in at a peak of S$15.4psf. We expect (so does CCT) negative rental reversions to persist in the remainder of 2011.

• Plans for MSCP redevelopment firmed, but uplift to come only in 2015. CCT has firmed up a 40:50:10 JV agreement with CapLand and Mitsubishi Estate Asia to redevelop MSCP into a Grade-A office tower. The development is expected to cost S$1.4bn (CCT’s share S$560m) and would be completed by 2015. CCT expects a yield on cost of 6% or S$12-14psf gross rents on completion, a level we think is achievable. More meaningful upside potentially could come from its call option to acquire the remaining stakes from its partners upon completion, at a minimum price that must yield a least a compounded return of 6.3% p.a. to the sellers. The option is valid for three years starting at the completion date, giving CCT the flexibility to optimise yield upside. For the MSCP redevelopment, execution will be its priority for now, with the DPU uplift coming much later in 2015.