2Q12 DPU in line with expectations. CapitaCommercial Trust (CCT) reported 2Q12 DPU of 2.06S'' (+7.3% YoY). Together with 1Q12 DPU of 1.90S'', 1H12 results translates to 51.2% of our FY12 DPU estimate. Revenue and net property income for this quarter came in at S$95.8m (+5.2%YoY) and S$75.2m (7.8%YoY) respectively. Distributable income came in at S$58.5m(+7.5% YoY), mainly attributable to revenue contribution from the acquisition of Twenty Anson, higher rental income from HSBC Building and Raffles City Singapore, and higher yield protection income for One George Street. Going forward, with a high portfolio occupancy of 96.2%, a relatively low 6.1% of lease expiry profile for the rest of the year, together with a portfolioof high quality Grade A office towers in prime location of Singapore, we expect CCT to be able to benefit from the stabilizing of Singapore's office market.  In view of these positive factors together with the recent drop in Singapore's 10-year government bond to 1.36%, we have upgraded our call on CCT to BUY with a DDM based of (COE: 8.7%; TGR:2.0%) TP of S$1.50.

Vacancy rate dropped during 2Q12, but so did rental rate. During 2Q12, Grade A office vacancy rate fell by 0.7ppts to 12.2%. Although the demand for office space has remained strong during this period, Grade A rents declined by 4.7% (8.2% YTD), on the back of a highly competitive leasing market. Going forward, on the back of limited new supply of Grade A office space for the rest of the year, we expect the downward adjustment of rental rate for this grade of office to stabilize. Given a high occupancy rate of 96.2% with only 6.1% of total gross revenue due for renewal, we believe the slow office market will have limited impacton CCT's income.

Room for further growth. Going forward, we believe CCT will continue to grow on the back of additional contributionfrom Twenty Anson, high rental income from HSBC Building and Raffles City Singapore. In addition, Twenty Anson's current passing rent is an average of S$6.20 psf/month vs the average of S$8.00 psf/month in the vicinity. We expect to see a respectable positive income reversion from this buildingwhen near to 50% of NLA is due for renewal in FY13.

Upgrade to BUY with TP of S$1.50. In view of possible room for growth in FY13, a low gearing of 30.1% and a recent drop in Singapore government 10-year bond to 1.36%, we believe CCT is inexpensive at the moment, trading at 0.85x P/B as compared to an average of 0.97x for the REITs sector. Taking these factors into consideration, we have upgraded CCT to BUY with a DDM based TP of S$1.50.

Source: OSK