• 1H17 revenue, net property income, DPU within our estimates.
• Continued pressure in rental reversions (1H17 down 1.6% YoY) driven by Bedok Mall and Westgate.
• Signs of stabilisation in tenant sales (1H17 flat YoY) driven by new tenants and promotions in the Music/Entertainment/Electronics sectors.
• F&B (biggest trade sector in portfolio at 30%) and supermarkets continue to be under pressure.
• Maintain Neutral with unchanged TP of S$2.01.

The positives

+ Cap rate compression boosted portfolio valuations: Valuation cap rates across portfolio compressed 50 bps on average, resulting in portfolio valuations (including joint ventures) to grow 2% to S$10.3 billion from S$10.1 billion in 1H17 compared to FY16. Subsequently, CMT’s net asset value (excluding distributable income for 2Q17) gained 2.7% to S$1.91.

+ Tenant sales in 2Q17 held steady: Tenant sales in 2Q17 stabilised after a 0.7% dip YoY in 1Q17. This is driven by new better performing tenants and promotions in the peripheral trade categories Music, Entertainment and Electronics.

The negatives

– Rental reversions in Westgate and Bedok Mall sustained declines: Westgate and Bedok Mall continued to face weaker rental reversions (1H17: -10%/-7.4%, 1Q17: -10%/-7.1%) which came in line with our expectations. We expect rental reversions in the remaining leases of Westgate and Bedok Mall due for renewal 2H17 (12.8% and 14.4% of properties’ NLA) to remain weak.

– Rental reversions continue to be weak, more malls could see negative reversions for 2H17: Rental reversions in 1H17 came in at -1.6% (1H16: +1.7%), which was mainly due to continued weakness in Westgate and Bedok Mall. We view that rental reversions in certain larger assets such as Junction 8, and notably Tampines Mall could face pressures moving forward amid a growing supply of retail space in the East cluster, in particular to Jewel Changi Airport.

– Food and Beverage (F&B) sector and Supermarkets continue to be under pressure: While some peripheral trade sectors did well, 1H17 tenant sales for these two traditional crowd-puller segments were down 2.5% and 7.7% respectively. F&B is also the largest trade sector in the portfolio at 30%.

Outlook

We expect continued pressure for rental reversions in 2H17. The tough operating retail environment is expected to continue with the ongoing threat of e-commerce. We do not see any clear near term catalysts for the operating performance of CMT.

Maintain NEUTRAL with unchanged target price of S$2.01.

This translates to a FY17e yield of 5.6% and P/NAV of 1.00.

Figures 1 and 2: CMT trades at below post GFC average valuations

Figure 3: Peer comparison table