CapitaCommercial Trust: Holding up for now

Good showing in 1Q09. CCT's distribution income of $45.4m (27% yoy, +20% qoq) translated to a DPU of 3.24cts and came in slightly ahead of market and our estimates. The better showing was achieved on a 37% yoy increase in topline to $97.5m on new contributions from OGS, Wilkie Edge and positiverental reversions. During the quarter the group renewed/leased 0.38sf of office space (14% of FY09 expiries) at 49% higher rents than preceeding levels. Occupancy remained at 96.7% at end Mar 09. NPI rose 41% yoy to $69.9m on implementation of cost savings measures and expense ratio dipped 5% pt to 28%. The group also secured refinancing for $160m of ST debt at 3% all-in interest margin.

Locked in 89% of forecast gross rental income for 2009. Outlook for the office sector remains soft in the near term owing to poorer economic activity and the large new incoming supply in the next 3 years. CCT's strategy would remain focused on existing tenants and maintaining high portfolio occupancy. To date, it has locked in 89% of its forecasted gross rental income for FY09 or c$318m in committed leases. It has a remaining 7.7% of office and 3.9% of retail lease to renew this year and a further 27% and 23% of leases expiring in FY10/11. Given the current weaker market rents and higher average of some of the upcoming expiries, the reversion gap is expected to narrow significantly.

Maintain Hold. We are maintaining our Hold call but have lifted our TP to $1.11. While we recognize that CCT's valuation is inexpensive, at 0.3x P/bk NAV, the overhang from refinancing and/or potential for capital management exercises remains given that 58% of its total debt (72% if CBs get put) is maturing over 2010/11. Moreover, gearing is at 38.3% and would rise to 45-50% on a 15-20% depreciation of asset values, a scenario that is not improbable given the soft office outlook. The stock is currently yielding 14.5% and 12.9% in FY09 and FY10 respectively.

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