Capitacommercial Trust - 2Q09 results- Positive reversions held up distribution

Within. 2Q09 core net profit of S$54m was within our expectations but below the Street’s, forming 30% and 24% of the respective full-year forecasts. 1H09 core net profit of S$91m makes up 51% of our full-year number.

Strong contributions from associates and China. 2Q09 revenue rose 34% yoy to S$250m on stronger contributions from development properties in China and improved sales in Singapore. Revenue from property trading increased 39% yoy to S$205m as KepLand sold over 100 units per month in its township projects in the last few months. At the associate level, stronger bookings from MBR and Reflections also boosted net profit.

Set to catch the property wave. At home, KepLand plans to launch The Promont and Madison Residences in 2H09, while releases of Reflections and Marina Bay Suites will be more opportunistic. If launched, we believe the projects will not be priced below market values. We expect margins to be strong given low land costs.

Raising exposure to resurgent China. In China, its 7.3m sf 55:45 JV project with KepCorp to develop township homes in Tianjin is an exciting proposition given the resurgence in the Chinese property market. The first phase will yield 1,760 homes, set for release in 2Q10. Total cost is estimated at over S$400m, possibly funded by proceeds from its rights issue. We estimate China now makes up 18% of its RNAV.

Office pre-leasing still weak. Pre-commitments for MBFC 1 & 2 remain at 60-65%. There have also been some pre-commitments for office space in OFC, but nothing meaningful. However, the pace of rental declines has moderated, suggesting some stabilisation in the office sector.

Maintain Outperform. We raise our FY09-11 core EPS estimates by 8-17% to reflect potential accretion from the Tianjin project and higher ASPs. Our end-CY10 RNAV has been raised by 6% as a result of this as well as higher marked-to-market valuations for KREIT. Our target price, still pegged at a 20% discount to RNAV, accordingly rises from S$2.77 to S$2.95. Weakness in the office sector remains a key risk but we believe stock valuations fully reflect this. We believe our capitalvalue assumptions for its Grade A office assets are conservative at S$1,300- 1,450psf, based on 6% cap rates. A quality residential inventory in Singapore and its China exposure are likely to be positives right now. Maintain Outperform.

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