3Q12 DPU in line with expectations. CapitaCommercial Trust (CCT) reported 3Q12 DPU of 2.04S'' (+11.5% YoY). Together with 1H12 DPU of 3.96S'', the first three quarters results translates to 76.9% of our FY12 DPU estimate. Revenue and net property income for this quarter came in at S$95.5m (+7.0%YoY) and S$75.2m (+8.6%YoY) respectively. Distributable income came in at S$57.9m (+11.6% YoY), mainly attributable to revenue contribution from the acquisition of Twenty Anson, higher rental income from HSBC Building, Capital Tower, Golden Shoe Carpark, Bugis Village and higher yield protection income for One George Street. Going forward, with a high portfolio occupancy of 97.1% together with expected positive rental reversion on the leases due for renewal in FY13, we believe CCT is wellpositioned to benefit from the stabilization of Singapore's Grade A office market. In view of these positive factors together with the continual interest in high dividend plays amid a strong Singapore dollars and a prolonged low-interest rate environment, we maintain our BUY rating on CCT with a revised DDM based (COE: 7.8%; TGR:2.0%) TP of S$1.77.

Rental rate remained soft in 3Q12 but positive take up rate. During 3Q12, the rental rate for office space in core CBD fell by an average of 2.5% to S$9.80 psf/month; translating to an approximate drop of 10.9% YTD. However, on the back of strong take up rate by professional business services and legal sectors, vacancy rate for core CBD and island-wide over this period dropped by 156bps and 112bps respectively. Going forward, on the back of limited new supply of Grade A office space until mid-FY13, we expect the downward adjustment of rental rate for this grade of office space to stabilize.

Room for further growth. Going forward, we believe CCT will continue to grow on the back of additional contribution from Twenty Anson and positive rental reversion from leases that will expire in 2013 (19.6% of gross rental income). Currently, CCT's average passing rent for the leases to expire in FY13 is at S$7.64 psf/mth. As compared to the market rate of S$9.80 psf/mth, we believe CCT is currently well positioned to capture potential rental upside when its leases expire in FY13.

Maintain BUY with higher TP of S$1.660. In view of possible room for growth in FY13, a low gearing of 30.9% and continual pursue for yield plays, we believe CCT is inexpensive at the moment; trading at 1.0x P/B as compared to an average of 1.08x for the REITs sector. Taking these factors into consideration, we maintained a BUY rating on CCT with a revised DDM based TP of S$1.77.

No further refinancing required in FY12/FY13. Recently, CCT has refinanced the entire S$146.8m CB which is scheduled to be due in 2013. This was funded via a new CB issue of S$175m due in 2017. Going forward, CCT has no outstanding borrowings due in FY12 and only S$50m of MTN due in FY13. However, given that the trust has sufficient bank credit facility in place to refinance
this amount, no further refinancing is required in FY13.

Currently trading at 3.8% spread to 10-year bond yield. CCT is currently trading at 3.8% spread to 10-year bond yield which is 158bps above its pre-crisis mean spread (2.2%), based on FY12/FY13 DPU. Our TP of S$1.77 translates to a
reasonable spread of 3.2%.

Key risks. CCT being an office REIT is highly susceptible to changes in the development of both the global and Singapore's economy. If economy in 2013 continues to soften, companies might have to downsize which could possibly lead to lesser tenants renewing their lease and negative rental reversion to take place. In addition, if the global economy enters into an economic crisis; as per the Lehman crisis in 2008, existing tenants may forego their deposits (c.3 months) and move out from the properties. This paradigm was observed in 2009 when the occupancy level dropped from 99.6% in 2007 to 94.8% in 2009 after the collapse
of Lehman in 2008.

Source: OSK