• FY17 gross revenue and DPU within our estimates.
• NPI margins improved YoY from 69.5% to 70.1%.
• Rental reversions came in at -1.7% for FY17, dragged down by Westgate, Bedok Mall.
• Expect continued pressure for rental reversions for FY18 on the back of high occupancy costs and upcoming supply.
• Maintain Neutral with higher TP of S$2.03 (from S$2.01).

The positives

+ Net Property Income (NPI) margins improved YoY from 69.5% to 70.1%. Property operating expenses were S$1.6mn lower yoy mainly due to lower utilities expenses. Utility cost savings could be expected for the next 2 FYs as these costs are hedged 2-year forward.

+ Gross revenue stable (excluding Funan) despite negative reversions. Higher revenue from better performing malls such as IMM building and Clarke Quay (higher occupancy yoy despite negative reversions) was sufficient to offset weakness in Bedok Mall and Tampines Mall.

The negatives

– Rental reversions came in at negative 1.7% for FY17, dragged down by Westgate, Bedok Mall and Tampines Mall. High occupancy costs and flat retail sales have cumulated to negative reversion pressures for most parts of 2017. FY17 occupancy cost at 18.7% are at close to record levels.

– Flat retail sales underperforming general retail sales index. FY17 tenant sales came in flat YoY, a trend that has held stable throughout the year. This contrasts with the slight recovery in overall industry retail sales where July-Nov 17 averaged 2.9% growth ex Motor Vehicles. Interestingly, management guided that in-mall luxury brands seem to be turning around.

Outlook

Although retail sentiment is expected to improve, we expect continued pressure for rental reversions for FY18 on the back of high occupancy costs. On top of the ongoing e-commerce threat, there is major supply of retail space over the next two years such as  Northpoint City, Paya Lebar Quarter and Jewel (totalling 1.1 mn sq ft). This will exert further pressure on rents for malls especially in the eastern region going forward.

Maintain NEUTRAL with higher target price of S$2.03 (from $2.01).

Our DPU forecasts for FY18e and FY19e are adjusted upwards by 0.8% and 0.7% as we factor in lower utilities expenses. Our new target price translates to a FY17e yield of 5.6% and P/NAV of 1.02.

Figure 1: Gradual pick up in retail sales index from 2H17

 Figures 2 and 3: CMT trades at cheaper than post-GFC average valuations

Figure 4: Peer comparison table