CapitaCommercial Trust: Rights issue completed

Rights issue completed. CapitaCommercial Trust (CCT) had recently completed its Rights issue with 1.4b new units listed last Friday, bringing the total number of outstanding units to 2.8b. The Rights issue was well- accepted, with a subscription rate of 135.4% of the total units available under the Rights issue. With the completion of the Rights issue, CCT's gearing will decline from 43.1% to 30.7%, after the repayment of borrowings using the proceeds.

Slower rate of decline in office rental but cautiousness is warranted. According to Jones Lang LaSalle, average prime Grade A office rental declined 11% QoQ to S$9.50 psf per month in 2Q09 and the decline had decelerated in comparison to the 28% QoQ decline in 1Q09. Despite the positive news, our fundamental view of a worsening office market going forward remains unchanged. The slower rate of decline also came after a steep decline in rental in 1Q09. The office market in Singapore will continue to be plagued by the huge oncoming supply of new office space (13.9m sq ft in the pipeline) and shadow space that will continue to put downward pressure on office rental.

Current gearing sufficient to withstand devaluation through downturn. At a post-Rights gearing of 30.7% after the recent revaluation of its properties, CCT can withstand a further S$1,995.6m or 31.8% decline in the valuation of its properties before it reaches the upper bound of its comfortable gearing range of 30%-45% and this is also more than the S$1,581.5m or 26.2% decline in valuation (based on latest valuation report) that we have factored in our RNAV computation. We believe that this provides a sufficient buffer for CCT to tide over the asset devaluation during this downturn without the need to tap on the equity market again.

Maintain BUY. Despite the weak sector outlook, we continue to like CCT for its quality office assets and strong management which is evident in the high portfolio occupancy rates, diversified tenant base and long established tenant-landlord relationship. Support from a strong sponsor - CapitaLand - also provides an added level of comfort to investors in turbulent time. Based on CCT's current price/NAV ratio of 0.54x, the market is now factoring in a 32.4% decline in asset value, which is over-excessive in our view. Success of its Rights issue has also removed refinancing concerns going forward. We maintain our BUY rating on CCT with fair value of S$0.96.

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