Maintain HOLD; Capacity for Another Acquisition

• In line with narrowing cap rates seen at recent transactions, the independent valuers have raised the valuation of its Singapore properties. After factoring its impending divestment of Twenty Anson, we believe CapitaLand Commercial Trust (CCT) has the balance sheet capacity to make another acquisition.
• Assuming similar terms to its recent acquisition of Galileo, we estimate a SGD600m acquisition could lift its FY19E DPU by 3.6%.
• Maintain HOLD and SGD1.80 Target Price, based on an unchanged target yield of 5.0%.

1H18 in Line; Unlikely to Start Share Buyback

CapitaLand Commercial Trust (CCT)'s 1H18 DPU of 4.28 cts is in line at 48% of our full-year estimates. With the exception of Asia Square Tower 2 which is 91.9% occupied, all other buildings are nearly full. While CCT has the mandate to acquire up to 2.5% of share buyback programme as the stock is currently trading close to its book value.

Higher Valuation of Singapore Properties

The valuation of its Singapore properties has been raised by an average of 1.3% in its regular half-yearly review. Notably, cap rate assumptions used by the valuers have been cut by 10-15bps with office cap rates now at 3.50-4.00%.

The lower cap rate assumptions used are in line with our observations of narrowing cap rates in recent transactions. Even after these revisions, the valuations of its assets remain fairly conservative. For example, HSBC Building is carried at SGD461m or SGD2,300 psf, which is 24% lower than the SGD3,020 psf recently paid for 55 Market Street.

Nonetheless, with management more keen on acquiring than divesting properties, this value is unlikely to be unlocked near term.

Room for Another Acquisition; Potential DPU Upside

We estimate CCT’s gearing at 35.1% after adjusting for proceeds from the sale of SGD276m for CapitaSpring.

Assuming the remaining headroom is used to finance a fully-debt funded acquisition worth SGD600m, we estimate a potential 3.6% upside to our FY19E DPU. This assumes similar terms to its recent acquisition of Galileo with an acquisition yield of 4.0% and debt cost of 1.4%.

Swing Factors 

Upside 

• Appreciation in the capital value of its properties. 
• Successful redevelopment of assets, such as Golden Shoe Carpark. 
• Earlier-than-expected rebound in office rents. 

Downside 

• Sharper-than-expected declines in office rents or occupancies. 
• Overpaying for acquisitions. 
• Cost overruns in redevelopment projects. 

Source: Maybank Kim Eng Research - 19 Jul 2018