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Brokers' take: DBS raises target price, OCBC increases fair value on CapitaLand Commercial Trust

DBS Equity Research raised CapitaLand Commercial Trust (CCT)'s target price from S$2 to S$2.10 and maintained its "buy" call, while OCBC Investment Research increased CCT's fair value from S$1.83 to S$1.88 and maintained its "hold" position. CCT shares were unchanged at S$1.93 as at the midday break on Monday.

The brokers made the calls based on a positive office rental market and a more dovish interest rate environment after the US Federal Reserve decided in March to hold off raising rates this year. 

Both research teams said there would be many chances for CCT to profit from the positive office rent market.

OCBC's Mr Wong said CCT's average expiring rents of S$10.44 per square foot (psf) per month in 2019, S$9.60 psf per month in 2020 and S$10.72 psf per month in 2021 are below the current market rate of S$11.15 psf per month. He added that this implied there is room for favourable rental reversions ahead.

DBS noted that Singapore office rents rose for the sixth straight quarter in Q1 2019. The S$11.15 psf per month rate reached at the end of this quarter was up 25 per cent from first-half 2017 lows, which the brokerage said should generate increased investor interest in CCT.

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It added that CCT remains undervalued "ahead of a multi-year upturn in office rents in Singapore" and limited supply over the next three years.

CCT's property valuations are below physical market transactions, and its expansion into Europe provides another growth avenue, DBS said.

DBS analysts lowered CCT's cost of debt from 3.5 per cent to 3.25 per cent, while OCBC analyst Andy Wong lowered CCT's risk-free rate assumption from 2.7 per cent to 2.3 per cent.

According to DBS analysts, CCT's first quarter 2019 distribution per unit (DPU) rose 3.8 per cent to 2.20 Singapore cents on the back of increased revenue and net property income, while OCBC's Mr Wong cited lower finance costs and a distribution of tax-exempt income of S$3.4 million as reasons for the increase in DPU.

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