CapitaCommercial Trust: Buys Wilkie Edge

Flat sequentially. CapitaCommercial Trust (CCT) released its 2Q07 on
Friday. Revenue came in at S$S$59.4m (+91.1% YoY and +2.5% QoQ)
with distributable income at S$29.28m (+84.7% YoY and +0.1% QoQ).
Distributable income per unit (DPU) came in at 2.12 cents (+19.8% YoY
and 0.5% QoQ), slightly below OIR's estimate of 2.17 cents. The strong
annual numbers were attributed to the inclusion of Raffles City (RC), higher
rental and car-park rates as well as investment income.
Buys Wilkie Edge from CapitaLand. CCT also announced the proposed
acquisition of Wilkie Edge, a 12-storey mixed development from CapitaLand
(CapLand) for S$262.0m. Completion is expected by end 2008. With this,
CCT appears to be changing its strategy by going for pre-completed and
untenanted assets. This raises the risk profile and reflects the difficulty in
acquiring accretively. As part of the agreement, CCT has granted CapLand
a 99-year lease for the service apartments for S$79.3m. We estimate the
GFA of the apartments at about 160,350 sq ft, which means selling price of
about S$495psf. This appears a little low considering that residential units
are going for substantially higher in the area.
Expect divestment gains. Separately, Quill Capita Trust, the Malaysian
associate of CCT, will be buying CCT's interest in Wisma Technip. The
acquisition price of RM125m will result in CCT recognizing a divestment
gain of RM4.4m (about S$2.0m), but the transaction is not expected to
complete until 4Q07.
Raffles City asset enhancement. CCT is presently enhancing Raffles
City. It is decanting space used for mechanical and engineering equipment
and this in turn will release about 41,000 sq ft of space for retail use. The
new space will be spread over 3 levels and will encompass building a 3-
storey island podium. The estimated capex is about S$56m and funding
will be via debt. We see no issues with respect to debt funding. Construction
has started and completion is expected by end 2007.
Maintain HOLD. The outlook for the office sector remains good for the
next two years due to limited supply. CCT is the key beneficiary of this
macro trend. Hence we anticipate strong organic earnings growth. However,
at present trading level, we see limited upside potential. We thus maintain
our HOLD rating with a fair value estimate of S$2.62, based on a target
asset size of S$5.5bn.