CapitaMall Trust - Demand weak with supply looming

The slowdown in Singapore’s GDP outlook and a fall in domestic consumption at a time of rising new retail supply present a challenging operating environment for domestic retail landlords. The reality is that the circumstances on the ground continue to deteriorate with Nomura’s economics team in the past quarter having cut its 2009F GDP growth expectation further to –7.6% from –6.3%. In this context, we think the retail sector is not immune to the broader economic slowdown. We retain our headline forecast for rents to weaken 17% over the cycle (CBRE indicating that 1Q09 rents had fallen 3.3% q-q) as competition among landlords for existing tenants intensifies, given the volume of new supply — some 2.5mn sf is due for completion in 2009F and 2.3mn sf in 2010F. The distribution of new supply is spread even for the next two years, in our view, with 33.4% scheduled to be completed in the prime shopping districts, 33.8% to be completed in secondary shopping districts and 32.9% to be completed in suburban locations, leaving CapitaMall’s city and suburban retail malls exposed to increased competition. Landlord net income also is likely to be trimmed once the overall retail expenditure falls, negating the fillip from leases structured with a turnover component.

Our Singapore economics team believes that while external demand perhaps is the greatest threat to the Singapore economy, private demand could disappoint and be weaker than expected, owing to feedback loops from negative wealth effects and a worsening labour market.

Since 2004, CapitaMall Trust REIT’s DPU yield has been an average 5.77%, equating to a 289bp spread over the average ten-year government bond of 2.88%. Currently, CapitaMall Trust’s FY10F yield is 6.0%, vs the current ten-year government bond of 2.60%, delivering a spread over the risk-free rate of 355bp. The historical low yield spread between CapitaMall Trust’s DPU yield and the prevailing risk-free rate in our view reflects the market’s growth expectations of the REIT over the period driven by rental reversions, asset enhancements (specifically in relation to decanting of space) and new acquisitions. We note that during 2004-09, CapitaMall Trust saw average annual compound growth in its DPU of 11.8%. We see that CapitaMall’s growth prospects are markedly different than those it experienced during 2004-09 — we forecast DPU to fall 30.6% over FY08F-FY11F. That said, there is inevitably a temptation to extrapolate past trends. If one adopts the historical yield spread (289bp) to the current risk-free rate (2.6%), which would imply a yield of 5.49% (vs its FY10 yield of 6.0%), equating to a unit price of S$1.53/unit. We believe our asset-based approach to valuing CapitaMall Trust incorporates the cashflow risks of both negative retail and office rental reversions, and higher cashflow risk given the shift to a more discretionary retail tenancy mix and higher vacancy risk, and believe such a “spread analysis” is overly simplistic.

We have revisited our valuation by rolling forward our intrinsic NAV to FY10F from FY09. We have subsequently pegged our new price target to our FY10F intrinsic value of S$1.19/unit (previously FY09 S$1.14/unit) and reaffirm our REDUCE call on CapitaMall Trust.

Sponsored Links

Related Posts by Categories