• Upgrade CapitaLand Commercial Trust to BUY; Target Price of S$1.95 on the back of the upgrade and repricing of CapitaLand Mall Trust’s target price.
• Merger allows CapitaLand Commercial Trust to ride on the phased reopening of retail malls via CapitaLand Mall Trust while positioned for recovery in the office sector when GDP starts to recover from 2Q20.
• Average expiring rents at S$9.37 to S$10.68 in FY20- FY22 provides a buffer for positive rental reversions.
• CapitaLand Commercial Trust’s new/renovated office space in CBD could be a silver lining if office demand recovers faster than expected.

Upgrade to BUY; Raise Target Price to S$1.95

• We upgrade our rating to BUY from HOLD on CapitaLand Commercial Trust (SGX:C61U) and raise our Target Price to S$1.95 from S$1.55.
• Our upgrade was mainly led by the upgrade and repricing of CapitaLand Mall Trust’s target price (see report: CapitaLand Mall Trust - DBS Research 2020-05-29: Breaking Free), assuming the merger is successful, which we admit was a quick revision from our previous call.

• Assuming the merger will proceed as planned, we believe CapitaLand Commercial Trust will ride on the phased reopening of retail malls within CapitaLand Mall Trust’s portfolio while being positioned for the progressive recovery in the office sector when GDP starts to recover from 2Q20. In addition, average expiring rents at S$9.37-10.68 in FY20-FY22 provides buffer to maintain positive rental reversions.

New/newly Refurbished Office Space in CBD Could be a Silver Lining If Demand Recovers Faster Than Expected

• While we acknowledge that CapitaLand Commercial Trust has upcoming supply from CapitaSpring (expected completion in FY21) and expected vacancies from tenants’ movement prior to COVID-19, it could be a silver lining if demand recovers faster and stronger than expected as it is possibly the only REIT with some new/newly refurbished office space in the CBD expected to complete in FY21 with minimal net office supply in downtown core in FY20F-FY22F.

Valuation

• We raised our DCF-based Target Price for CapitaLand Commercial Trust to S$1.95 from S$1.55 previously based on lower beta of 0.8 (0.9 previously) on the back of gradual economic recovery following the phased reopening and repricing of CapitaLand Mall Trust's target price.

Source: DBS Research - 8 Jun 2020