SINGAPORE (Feb 11): Daiwa Capital Markets has altered its view on CapitaLand Commercial Trust (CCT) by almost 180 degrees, on the back of the REIT standing to benefit on “favourable terms” from its merger with CapitaLand Mall Trust (CMT). 

The merger will generate a diversified commercial REIT to be named CapitaLand Integrated Commercial Trust (CICT), with a market capitalisation of $16.8 billion and a combined property value of $22.9 billion. 

After obtaining the necessary approvals, the proposed merger is expected to be completed before the end of 2QFY20.

See: CMT, CCT propose merger to create largest REIT in Singapore, third largest in Asia Pacific

The brokerage has not only upgraded CCT to an “outperform” from the previous “sell” recommendation, but has also raised its target price by some 42% to $2.29, representing a 12.3% upside for the stock. 

In a Friday report, lead analyst David Lum identifies several positive impacts of the merger on CCT that could bolster its financial and operational metrics further. 

“We revise our financial and distribution per unit (DPU) forecasts and introduce our 2022 forecasts after incorporating the 4Q19 results and finetuning our rental-reversion assumptions,” shares Lum. 

“Although office spot rents could be peaking, we still expect most of the Singapore office properties to enjoy rental reversions of 10-20% for FY20-22E,” says Lum, adding that CCT’s average in-place monthly office rent was $10.08/sqft

Lum opines that a strong y-o-y DPU growth is in the pipelines for the group for FY21-22E, led by the progressive income contribution from CapitaSpring, which is scheduled for completion in 1HFY21. Other contributors include CCT’s 45% stake in the Glory Trust Structure, as well as rent from WeWork’s lease in 21 Collyer Quay. 

With the merger, Lum believes that CICT is likely to provide a stronger and sounder platform for sustainable DPU-accretive acquisitions with a Singapore focus. 

“We also believe CICT stands a better chance of enjoying a lower cost of equity through cycles than either CCT or CMT,” says Lum, adding that apart from enjoying yield compression, the REIT will be more defensive during an office downturn. 

Although a potential downside risk for CCT comes in the form of an unforeseen collapse in the Singapore office-rental market, Lum says that CICT would be better insulated than CCT. 

As at 9.29am, units in CapitaLand Commercial Trust are trading flat at $2.04. This translates to a price-to-earnings (P/E) ratio of 23.0 times and a DPU yield of 4.4% for FY20E according to Daiwa valuations.