CapitaCommercial Trust - A “sweetener” in place (DBSVickers)

BUY S$1.45 STI : 3,088.70

Price Target : 12-Month S$ 1.59

Reason for Report : 2Q11 Results

Potential Catalyst: Higher rental reversions

DBSV vs Consensus: below, lower rental version compare to peers

• 2Q results inline with expectations, on better operational performance

• Market Street CP redevelopment plans firmed up, call option to purchase remaining stake granted

• Maintain BUY, TP S$1.59

Results in line with expectation. On a yoy basis, 2Q gross revenue and NPI declined by 9.6% and 5.9% to S$91m and S$69.8m respectively. However, performance remained relatively stable on a qoq basis. Meanwhile, portfolio occupancy dropped marginally to 97.7% affected by 6 Battery Road AEI. The trust also recorded a revaluation gain of S$153.4m (+2.8% yo-y). Stripping that off, 2Q DPU was at 1.92cents, making up 56% of our FY11 numbers or 52% of street estimates.

Operations gaining traction. The trust has another 7.5% of its office leases (in terms of gross revenue) up for renewals for 2H11. With the recovery in office rents, the spread between current and expiring leases is narrowing, indicating lower downside risk from negative rental reversion. Meanwhile, precommitments for 6 Battery Road AEI had risen with 74,400sf or 79% of the total upgraded space (93,700sf) taken up.

MSCP redevelopment to commence in Sept. Tenants in the carpark had vacated the building since June 2011. A Grade ‘A’ office building will be jointly developed by MSO Trust, which is held by CapitaLand (50%), CCT (40%) and Mitsubishi Estate Asia (10%). Total development cost is expected to be S$1.4 b. The site, currently held by CCT, will be acquired by MSO at S$56m which is 5.1% above its latest valuation. CCT is also granted a call option to buy the completed asset within 3 years after the TOP date at the prevailing market value or not lower than 6.3% pa CAGR on the estimated cost of return.

Maintain our buy call with an unchanged TP at $1.59. Balance sheet is strong with a gearing of 26.9%. The group has also just completed its refinancing exercise for the year and should be in a good financial position to undertake the MSCP project, which will start in Sept. Our TP at $1.59 offers 14% total return.