• 4Q17 adjusted DPU +6.1% YoY
• Full year contribution from AST2 in FY18
• Trading above book value

4Q17 Results Within Our Expectations

CapitaLand Commercial Trust (CCT) reported an in-line set of 4Q17 results. Gross revenue and NPI declined 3.8% and 4.0% YoY to S$86.3m and S$68.0m, respectively. This was attributed to the loss of income from divestments, but partially offset by higher contributions from CapitaGreen and Asia Square Tower 2 (AST2) which was acquired on 1 Nov 2017. DPU slumped 13.0% YoY to 2.08 S cents as a result of a rights issue exercise carried out for the acquisition of AST2. If we apply the same number of units outstanding to 4Q16 for comparison purposes, adjusted DPU would have increased 6.1% YoY.

For FY17, CCT’s NPI jumped 14.8% to S$265.5m and this constituted 102.9% of our forecast. DPU of 8.66 S cents represented a decline of 4.6% and came in close to our 8.62 S cents forecast. If we adjust for the rights issue as highlighted earlier, DPU for FY17 would have grown 5.0%.

Rentals Likely to Gain Traction Ahead

CCT’s portfolio occupancy stood at 97.3%, slightly lower than the 98.5% registered as at end-3Q17. AST2’s occupancy was 90.5%, which leaves room for growth as we are confident that management will be able to ramp up the occupancy at the asset, with co-working operators a potential target segment. CCT’s asking rents are S$11.50-S$12.50 psf/month for the asset.

In 4Q17, committed rents at Six Battery Road and One George Street were S$10.69-S$13.50 and S$9.00-S$10.60, versus average expired rents of S$12.77 and S$9.62, respectively. According to CBRE, core Grade A CBD office rents rose 3.3% QoQ to S$9.40 psf/month in 4Q17, gaining momentum following the 1.7% QoQ increase in 3Q17.

FY18F Distribution Yield of 4.7% Based on Closing Price of S$1.90

We raise our FY18 and FY19 DPU forecasts by 2.5% and 2.8%, respectively, largely on lower finance costs assumptions. We also raise our terminal growth rate from 1.8% to 2.0% to take into account clearer indications of a recovery in the core Grade A CBD office rental market. Rolling forward our valuations, our updated fair value estimate is S$1.84. Based on the last closing price of S$1.90, CCT is trading at FY18F distribution yield of 4.7% and P/B ratio of 1.1x.

Source: OCBC Research - 26 Jan 2018