• CapitaLand Commercial Trust's 3Q18 DPU of 2.20 Scts (+8.9% y-o-y) in line with expectations.
• Boost from recent acquisitions with better times ahead on the back of rising spot rents.
• Still awaiting deployment of proceeds from sale of Twenty Anson into Europe.

Undervalued

• We keep our BUY call on CAPITALAND COMMERCIAL TRUST (SGX:C61U) with a revised Target Price of S$2.00.
• We believe CapitaLand Commercial Trust remains undervalued ahead of a multi-year upturn in office rents in Singapore. In addition, with its property valuations below physical market transactions, CapitaLand Commercial Trust is trading at attractive valuations at the current share price.
• Also, the recent expansion into Europe provides another growth avenue which we believe the market has not fully appreciated.

Where We Differ – Deserves to Trade at a Premium

• CapitaLand Commercial Trust trades at 1.0x P/Bk but we believe it should trade close to 1.1x P/Bk, as it demonstrated the conservative valuation of its properties via the sale of three office buildings at 14-39% premiums to book over the past 1.5 years. Its book also remains understated with buildings such as Capital Tower and 999-year leasehold HSBC Building priced at S$1,847 and S$2,275 psf respectively, a discount to transactions of S$2,400-2,700 psf for comparable buildings.
• In the midst of a multi-year upcycle in office rents, CapitaLand Commercial Trust also typically trades at a premium to its book value.

Multi-year Upturn in Rents

• With Singapore office rents increasing for the fifth consecutive quarter, hitting S$10.45 psf/mth at end-3Q18, up 17% from the lows in 1H17, we believe this should generate increased investor interest in CapitaLand Commercial Trust.
• Focus should turn to the expected multi-year recovery in office rents as new supply over the coming three years is limited. This, the rise in office rents, should act as re-rating catalyst.

What's New

Tweaking DPU estimates for higher borrowing costs and disposal of Twenty Anson

• To incorporate more conservative borrowing cost assumptions (2.8-3.2% versus 2.7-2.8% previously) which is partially offset by lower debt balances owing to the earlier sale of Twenty Anson for S$516m and extension of lease at Bugis Village, we have lowered our FY18/19/20F DPU by 0.1%/0.5%/1.5% respectively.
• In addition, we have also raised our long-term cost of debt assumption to 3.5% from 3.0% previously which leads us to lower our DCF-based Target Price to S$2.00 from S$2.12 previously.
• Our Target Price implies a P/Bk of 1.1x down from 1.2x as we believe, the current macro uncertainty will likely result in the market ascribing a smaller premium to book than we had previously assumed.

Maintain BUY, Target Price of S$2.00

• On the back of expectations of a multi-year recovery in office rents due to limited supply over the next few years, which should translate into higher rental income ahead, we reiterate our bullish view on CapitaLand Commercial Trust. There is also upside risk to our earnings should CapitaLand Commercial Trust deploy its strong balance sheet into Europe.
• Thus, we maintain our BUY call with a revised Target Price of $2.00.

Source: DBS Research - 26 Dec 2018