Current S$1.07
Target S$1.17
Previous Target S$1.17
Up/downside 9.02%
We believe that market is valuing CCT’s assets at distress valuations, unjustified given its much stronger balance sheet vs. last crisis. Also, CCT’s exposure should be mitigated by yield protection for One George Street and its under-rented portfolio.
CCT’s 3Q11 and 9M11 DPU were in line, forming 25% and 77% of our full-year estimates, respectively. Having already factored in an office slowdown, we are keeping our forecasts and DDM-based target price. Maintain Trading Buy.
Mitigation for rental downside
3Q11 NPI was down 9% on negative office rental reversions and absence of rental income from Starhub Centre (sold in 3Q10). While an office slowdown is imminent, we expect income downside to be mitigated by yield protection from One George Street (significant lease expiries next year), with rents on expiring leases pegged at levels closer to current market and a long WALE of 4.7years.
Renewing leases ahead of expiries
We believe that CCT’s proactive approach towards reducing upcoming lease expiries should mitigate risks from a sharp rental falloff on expiries. CCT signed office leases amounting to 151k sf of renewals and new leases in 3Q11, including a forward lease renewal with EDB. These took uncommitted office leases expiring in 2011 and 2012 down to 9% and 15% from 11% and 19% respectively in 2Q.
Strong balance sheet to tide through dark clouds
CCT’s strong balance sheet position should tide it through looming dark clouds. With potentially less revaluation downside risk given sub-peak asset valuations and rentals, we do not see CCT revisiting its previous trough.
Distress implied asset valuations unjustified
Trading at 0.7x P/BV, we believe that market is valuing its Grade A office portfolio at distress cap rate of 7% and capital values of S$1.4k psf, way below S$1.7k psf for prime office assets during the last downturn. We deem this unjustified given its stronger balance sheet this time round.
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