SINGAPORE (Jan 26): Brokers are divided on their recommendations for CapitaLand Commercial Trust (CCT), after its manager yesterday announced a 13% decline in 4Q DPU to 2.08 cents due to absence of income of properties divested in 2H17.
See: CapitaLand Commercial Trust posts 13% decline in 4Q DPU to 2.08 cents on divestments
In a Friday report, RHB has downgraded its call on CCT to “sell” from “take profit” with a slightly higher target price of $1.63, after tweaking FY18-19F distribution per unit (DPU) higher by 0-1% and lowering COE assumptions to 5.9%.
The downgrade is backed by analyst Vijay Natarajan’s view that CCT’s DPU is only likely to benefit from the positive effects of Singapore’s improving office sector outlook after 2020, due to the expected near-term negative rent reversions stemming from high expiring rents for the trust’s leases.
In particular, the analyst remains slightly less optimistic than consensus on office rent growth than consensus, attributing high vacancy rates to indigestion from a huge influx of supply last year and flight to quality from tenants in the older Grade A office buildings, which could cap rent growth.
“While we expect office rents to rebound by 5-10% for 2018, we believe that consensus are looking at more than 10% rent increase for this year. We also note that while Grade A office rents have picked up by 5% (based on CBRE data) over last two quarters, vacancy rates (Grade A) remain on the high side at 6.2% (5- year average – 5.4%),” explains Natarajan.
Meanwhile, DBS Vickers Securities is maintaining its “buy” call on CCT with an unchanged target price of $2.10 on expectations of over 10% total return over the coming year.
Valuations are still compelling, in the opinion of the research house’s lead analyst Mervyn Song, who thinks CCT’s yield can tighten further given how it is only at the start of a multi-year upturn. Given how liquidity has been driving asset prices, he advocates focusing more on price-to-book value or the differential between CCT’s property valuation and physical market transactions.
“Consensus’ target prices have moved from a discount to a premium to CCT’s book value since we advocated that CCT should trade at a premium, as CCT demonstrated the conservative valuation of its properties, through the sale of three office buildings at 14-39% premiums to book,” says Song.
“However, the 1.06 times P/B accorded by the market is still too low and CCT should trade at P/B of 1.2 times which is a typical experience during an upcycle. CCT’s book also remains understated with buildings such as Capital Tower and 999-year leasehold HSBC Building, priced at $1,847 and $2,275 psf, respectively, a discount to recent transactions of $2,400-$2,700 for comparable buildings,” he adds.
CIMB Research and OCBC Investment Research have, however, maintained their “hold” calls on CCT with a respective target price and fair value of $1.93 and $1.84.
“While we like the trust for its pure exposure to the office cycle recovery and ability to rejuvenate its portfolio through AEIs and redevelopment activities, near-term upside remains limited,” notes CIMB lead analyst Lock Mun Yee in a Friday report.
Lock nonetheless believes CCT’s reversion gap should narrow on the back of improving office spot rents going forward, while its FY18 earnings are expected to be boosted by a full-year contribution of Asia Square Tower 2 (AST2).
In a separate report, OCBC lead analyst Andy Wong opines that rentals are likely to gain traction ahead, and is confident that its management will be able to ramp up the occupancy at AST2 with co-working operators being a potential target segment.
As such, he has raised FY18 and FY19 DPU forecasts by 2.5% and 2.8%, respectively, on lower finance cost assumptions while factoring in a higher terminal growth rate to account for clearer indications of a recovery in the core Grade A CBD office market.
As at 3.55pm, units in CCT are trading 4 cents higher at $2.11, implying a FY18 distribution yield of 5.22% based on OCBC forecasts and valuations.
