Brokers' Take Published March 29, 2008

CapitaCommercial Trust

March 28 close: $2.18

CITIGROUP RESEARCH, March 27

CALL option on 1 George Street at a price of S$1.165 billion: This works out to be S$2,600 psf of NLA. The call option is conditional upon unitholders' approval at EGM by June 30, 2008.

4.25 per cent net property yield support for 5 years: CapitaLand will provide a yield protection to CCT, ensuring a minimum net property income (NPI) of S$49.5 million per annum for 5 years to 2013. The minimum. NPI translates to a breakeven rental rate of S$10.50 psf per month.

Net debt/asset ratio to rise from 27 per cent to 40 per cent: CCT has obtained 100 per cent committed debt-funding for the transaction and will not be raising equity via placement of CCT units or rights issue. The acquisition will increase its asset size to S$6.5 billion from S$5.3 billion.

Little disclosure: Although CCT disclosed during the media/analysts briefing that 50 per cent of the leases are due for renewal over the next two years, the manager was unable to provide details and if there are rental caps among its key tenants. The cost of debt is not disclosed either. Based on our initial estimates, DPU enhancement could be 1.3 per cent, 3 per cent and 5 per cent respectively if cost of debt is 3.5 per cent, 3.25 per cent and 3 per cent.HOLD.

MACQUARIE RESEARCH EQUITIES, March 27

CCT has been granted a call option from parent CapitaLand to buy 1 George St, a completed office building for S$1.165 billion, or S$2,600 psf.

In August 2007, CapitaLand bought out the balance 50 per cent interest in 1 George St from the Eureka fund for circa S$2,700 psf. With 100 per cent ownership, it has granted to CCT the option to purchase the asset, subject to unit-holder approval at an EGM to be held before June 30, 2008. If approved, timing of completion is expected to be before July 31, 2008.

CapitaLand is providing a 5-year yield protection for CCT, to ensure a minimum net property income (NPI) of S$49.5 million per annum or a 4.25 per cent yield at the purchase consideration. The implied rental rate is circa S$10.50 psf, which is lower than spot rents of S$16-18 psf.

1 George St was completed in 2004 when rents were softer, hence we believe the current NPI is likely to be below the guaranteed amount until the next reversion cycle.

The acquisition will enhance CCT's position in prime office exposure, from 43 per cent of income to 55 per cent of income. Its total office exposure will also rise from 59 per cent of income to 69 per cent. Further, the single asset concentration is reduced from 40 per cent (from Raffles City) to 32 per cent.

The purchase will be debt funded, and borrowings are already fully underwritten by banks. Hence, there will be no equity issuance in any form.

CCT's gearing will increase from 27 per cent to 40 per cent post this transaction, well within its optimum of 40-50 per cent and below the regulatory limit of 60 per cent. Based on current passing rents of S$6.50 psf, the net yield works out to about 2.2 per cent; hence a theoretical dilution to FY09 DPU of 12.5 per cent. However, given the current spot rents of S$16-$18 psf for that location, we believe that by FY09/10, the rental income may even be higher than the income support provided.

Earnings revision: No change. We have not included the contribution from 1 George St until the acquisition is approved. With the income support, assuming 3.6 per cent cost of debt, accretion to FY09 DPU will be 4.3 per cent. Even if CCT gets funding at its current portfolio cost of debt of 3.9 per cent, accretion will still be about 2.1 per cent.

12-month price target: S$3.53 based on a DCF methodology.

Catalyst: Strong rental reversions in 2008E and 2009E. Passing rents are 50 per cent below current spot rents.

CCT remains our top S-Reit pick with potential upside of about 70 per cent. Its asset base will grow to S$6.5 billion once 1 George St is acquired.OUTPERFORM.

StarHub

March 28 close: $3.11

CIMB RESEARCH, March 28

StarHub has successfully retained its four lots of 1800 MHz spectrum rights and won two additional lots of 2G spectrum - one lot of 1800 MHz and one lot of EGSM - in a spectrum reallocation exercise by the IDA. Existing spectrum rights for all three mobile operators were originally due to expire on Sept 30, 08, but have now been extended to Dec 31, 08. The six lots of spectrum would cost StarHub a one-time fee of S$1.9 million.

Comments: Prospects of improved coverage quality but no significant earnings impact. The win of the EGSM spectrum, which operates on 900 MHz, will enable StarHub to improve its mobile coverage in harder-to-serve areas due to better signal propagation properties relative to the 1800 MHz spectrum.

This would improve its mobile subscriber experience but we do not expect a big impact on earnings. The new spectrum lots are not expected to require fundamental changes to mobile networks and the cost for spectrum had been included in management's guidance for 2008.

DCF-based target price of S$3.76: StarHub remains our top Singapore telco pick for its attractive CY08 yield prospect of 9.8 per cent backed by strong free cash flow, an unrivalled triple-play proposition and exposure to telco service consumption growth in Singapore.

Key catalysts for a sustained outperformance could include an upgrade on consensus dividend/capital return expectations which remain well below StarHub's free cash flow prospects, steady earnings delivery (cable TV likely to surprise on the upside) and a risk-averse market environment. OUTPERFORM.

Compiled by UMA SHANKARI
Disclaimer: All analyses, recommendations and other information herein are published for general information. Readers should not rely solely on the information published and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein. Brokers who wish to send in their reports can email us at btnews@sph.com.sg