CapitaCommercial Trust – Attractive yields to prevail, against all odds

CCT’s shareprice has underperformed the market since the beginning of the year, declining by about 25% YTD, versus the STI’s 13% decline and the FSTREI Index’s 23% decline. We believe that the concerns of DPU sustainability and a rights issue in the near future still weigh on the investor’s psyche.

We reiterate that having already locked in 79% of the forecast in gross rental income, CCT’s management is confident of delivering its forecast DPU of 12.34 cents in FY09. This represents a 12.2% growth in the DPU, due largely to the greater contributions from One George Street, Wilkie Edge, as well as positive rental reversions.

Given the severity of the global recession and the new supply of Grade A office space coming onstream from 2010, spot rents and the average occupancy rate for CCT’s portfolio of properties may be affected. We now factor a 20% decline in spot rents in FY10, and office portfolio occupancy rates of 92.5% and 90% respectively for FY10 and FY11. Even so, we still expect FY10 and FY11 DPUs of 12.4 and 12.5 cents respectively.

Unlike CapitaMall Trust, CCT does not have significant CAPEX requirements, having aborted its plans to redevelop Market Street Car Park. As for the $885m-debt maturing in 2010, we reckon that it can be secured against One George Street and 6 Battery Road (combined value of $2.5b) at a 50% LTV, even if their valuations decline by 30% from Dec 08. Hence, we do not foresee the need for CCT to undertake any rights issue in 2009 and 2010.

Despite adopting more stringent assumptions, we think that CCT can still provide attractive DPU yields of 18.0% and above, a hefty 1500 bps spread over the average 10-year government bond yield. We reiterate our BUY recommendation, with a DDM-derived target price of $1.40, assuming a 0% terminal growth rate.

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