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

CapitaMall Trust - The Behemoth In Retail

Retail sales have rebounded. 1Q09 performance was disappointing as consumers shied away from shopping malls during the Chinese New Year season. However, shopper traffic and retail sales bottomed out in Feb 09 and picked up in Apr-May 09. Negative growth for retail sales has narrowed. Basic and necessity goods have fared much better than luxury items.

Quality malls attract long-term tenants. Occupancy reached 99.5% in 1Q09, which is impressive as there is little impact from the recession. CMT benefitted from a flight to quality to well-located malls. Core tenants, eg BHG, Cold Storage and NTUC Fairprice, are players with long-term plans for the Singapore market. Renewal and new leases for 169,233sf of space signed in 1Q09 boasted rental rates that were 1.3% higher than preceding rates.

Occupancy remains in the high-90%. We visited Tampines Mall, Plaza Singapura, Bugis Junction, Raffles City, IMM Building and Sembawang Shopping Centre over the weekend. Shopper traffic was heavy. There were no visible vacant shops at the malls, thus giving us confidence that CMT has maintained occupancy in the high-90% going into 2Q09. We are impressed by CMT's efforts in organising promotional, cultural and educational activities to attract shoppers.

We raise our 2010 and 2011 DPU forecasts by 6.1% and 13.0% to 8.7 and 7.8 cents respectively after factoring in contributions from Jurong Entertainment Complex, which will be completed in 2H11. We also expect occupancy to taper off to 94% (previous: 88%) and retail rentals to correct 12% (previous: 15%). Upgrade to BUY with a target price of S$1.70, based on a dividend discount model (required rate of return: 7.2%, growth: 3.0%).

However, there is another report saying... In the midst of tapering islandwide retail occupancy, we visited three of CMT's competitor malls and conclude that CMT's portfolio should be resilient despite the competition. We are now more positive that rental levels at its suburban malls can be supported. We change our rent assumptions for most of CMT's malls to moderate growth of 3-5% for 2010-11, from declines of 5-10%, and have adjusted for the number of REIT units post-rights. Our 2009 DPU estimate drops by 8% while our 2010-11 estimates rise by 12-25%. Our new DDM-derived target price is S$1.26, up from S$0.87. Compared with its peers, CMT is expensive at 0.86x P/BV and 6% yields vs. the sector average of 10.2%. Maintain Underperform.