CapitaCommercial Trust: Overhang concern on gearing removed

1-for-1 Rights issue at S$0.59. Last Friday, CapitaCommercial Trust (CCT) announced that it will be doing a 1-for-1 Rights issue at an issue price of S$0.59 per rights unit. Issue price is at a steep discount of 44.3% to its closing price of S$1.06 prior to the trading halt. Approximately 1.4b units will be offered, raising gross proceeds of S$828.3m from the exercise. Of the proceeds raised, approximately 85%-95% (S$704.1m-S$786.9m) will be used to reduce borrowings. CapitaLand, which has a 31.4% stake in CCT, has committed to subscribe its proportionate share of the Rights units, which will require capital commitment of ~S$260m.

Steep decline in asset value warrants the need for capital raising. Latest valuation report of CCT's properties revealed a sharp decline in the valuation of CCT's assets. Valuation of its combined asset portfolio (as at 22nd May) has declined by S$681m (10.2%) from its December valuation to S$6,029.6m and the lower valuation was due to independent valuers using more conservative rental rates in their forecasts despite keeping their cap rate assumptions largely unchanged. Decline in asset value has pushed CCT's gearing level up from the reported 38.3% at the end of 1Q09 to 43.1% now, which is close to the upper band of CCT's target gearing level of 30%-45%.

Financial impact. Following the Rights issue, CCT's gearing level will decline from 43.1% to 30.7%, which is near the lower bound of its target gearing range. Net asset value will also decline from the reported S$2.94 per unit at the end of 1Q09 to ~S$1.52 per unit after adjusting for the decline in asset value and dilution impact. Our DPU forecast for FY09 will also be diluted by 46.4% to 6 S-cents, translating to a DPU yield of 7.3% base on the theoretical ex-Rights price of S$0.825 per unit.

Maintain BUY. The weak office market outlook is already a well-known fact and with declining office asset values, CCT's move to tap on the equity market is within our expectation. Depending on new debt for refinancing is unlikely to be sustainable as declining asset value would reduce the amount of loan obtainable through encumbering of assets and cost of borrowing could increase with the higher gearing. With the overhanging concern on its gearing removed, we think that this should be a positive catalyst to CCT's share price. We keeping our fair value of S$1.33 and maintain our BUY recommendation on CCT. Our ex-Rights fair value will be S$0.96.

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