CapitaCommercial Trust - Associate adopting same strategy

CCT's associate grows. CapitaCommercial Trust's (CCT) 30% Malaysian
associate Quill Capita Trust (QCT) recently announced its intention to
acquire 2 properties in Kuala Lumpur for RM215m. This would be QCT's
first acquisition post IPO and is in line with its growth strategy to double
its asset size to RM 560m by end 2007. The acquisition is to be equity
funded and CCT intends to subscribe to its allocation to maintain its
proportionate stake in QCT, and the amount is small at under S$30m.
More importantly, with its gearing standing at 32% and an investment
portfolio value of about S$3.8bn, its balance sheet is well able to support
additional debt of over S$500m.
Divestment gains. One of the assets that QCT is buying is Wisma Technip,
which CCT has an interest via its 100% investment in its junior bonds. The
acquisition price of RM125m will result in CCT recognizing a divestment
gain of RM4.4m (about S$2.0m). As completion is in 4Q07, we will adjust
our forecast upon the release of CCT's 1H07 results expected in late July.
Asset enhancement at Raffles City. Presently, the key development is
the asset enhancement works (AEW) at Raffles City. CCT intends to decant
space currently used for mechanical and engineering equipment. This will
release about 41,000 sq ft of space for retail use. It will be spread over 3
levels and will encompass building a 3-storey island podium. The estimated
cost is S$56m and funding will be via debt. As stated previously, we see
no issues with respect to debt funding. Construction has started and
completion is expected by end 2007. The estimated bottom-line accretion
from this AEW is about S$2.7m, or a DPU of 0.20 cent.
Maintain HOLD. In light of the development and the expected rapid growth
of QCT, we are including QCT's market capitalization into CCT's valuation.
Presently, the effect is small at about S$0.04/CCT unit. However, depending
on how the REIT sector pans out in Malaysia, QCT's valuation to CCT
could be meaningful in the future. More significantly is the expected asset
size growth for CCT, and management has guided on S$5-6.0bn by 2009.
We see this as achievable with the positive outlook for the office sector.
Our valuation has an asset target size of $5.5bn. Finally with the inclusion
of QCT, our fair value estimate is revised up from S$2.58 to S$2.62. We
maintain HOLD rating.