Nomura upgraded CapitaLand Commercial Trust to Buy from Neutral, pointing to 21 Collyer Quay as a near-term catalyst.
“In addition to its high earnings growth visibility over the next three to five years as well as the potential near-term catalyst with respect to 21 Collyer Quay, we also like CCT because of its relatively low aggregate leverage of 35 percent, high percentage of fixed or hedged borrowing costs and minimal refinancing needs in fiscal 2019, which together make the stock less vulnerable to higher interest rates,” Nomura said.
In September, the trust said it was evaluating its plans for 21 Collyer Quay after April 2020 when its sole tenant, HSBC, will move out. The options for the 200,000 square foot property could include refurbishment, redevelopment, re-letting and divestment, CCT said at the time.
Nomura estimated the redevelopment of 21 Collyer Quay, which accounts for 4.2 percent of CapitaLand Commercial Trust’s portfolio value, could yield a potential S$285 million gain, or S$0.08 a unit.
“Even in the case when the plot ratio of the site has already been fully utilised (which then implies little or no differential premium to be paid), we think a new building could yield higher efficiency and command better rents,” the note said.
It added that CCT could also divest the building.
“The property sits on a valuable 999-year leasehold site in prime Central Business District location,” it noted and pointed to the former Straits Trading Building nearby, also with a 999-year leasehold land title. It sold for more than S$3,500 a square foot in 2016, which would be a premium of 52 percent on 21 Collyer Quay’s latest valuation, Nomura said.
In addition, Nomura pointed to CapitaLand Commercial Trust’s earnings outlook.
It forecast distribution per unit (DPU) would grow an average 1.6 percent a year between now and 2020 and 2.9 percent a year from now through 2022.
“This will be primarily driven by the contribution from the new acquisitions made (before 2021F) as well as the 45 percent-owned CapitaSpring project,” it said.
It raised its target price on the unit to S$1.92 from S$1.69 after rolling over to 2019 valuations and including a potential gain of S$0.08 a unit from redeveloping 21 Collyer Quay.
Units of CapitaLand Commercial Trust were down 2.33 percent at S$1.68 at 9.37 A.M. SGT; the Straits Times Index was down 2.49 percent at 9:22 A.M. SGT.