We initiate coverage with a NEUTRAL rating and a DDM-derived target price of S$2.01. We have assumed a risk free rate of 3.1% and terminal growth of 1.5% in our forecasting.
Singapore’s first and largest retail REIT, CMT owns 16 shopping malls across Singapore, making them the largest shopping mall owner in the country with a 14% market share. 75% of CMT’s malls are strategically integrated with MRT stations, with the rest a maximum 5 minute walk away.
With these ideal locations and a heavy focus on necessity shopping (79.5%), CMT has been able to maintain an average occupancy of 98.8% over the 15 years since listing. Portfolio occupancy was remarkable even through the GFC years in 2008-2009 at 99.7% and 99.8% respectively, highlighting the resilience of CMT’s well located malls.
Figure 1: CMT’s well located malls at important transport nodes
Singapore’s retail sales suffered its third consecutive year of contraction and weakest annual performance since 2009. 1Q17 did not fare much better as Retail Reits CMT and FCT reported YoY drops in tenant sales, albeit with better March numbers vs Jan-Feb. Amid the glut of pessimistic retail sales data, we expect a turnaround going forward in 2017. Singapore’s GDP growth has picked up from what we believe was the inflexion point in 3Q16.
Figure 2: GDP growth picked up since 3Q16 after Singapore narrowly missed a technical recession.
Consumer sentiment looks set to improve backed by healthy household balance sheets, supported by a resilience and turnaround in property prices in 2H17. This comes after 14 consecutive quarters of decline since 4Q13. Residential assets make up 44% of household balance sheets. The government’s first “easing” of property cooling measures in 1Q17 has done much to improve sentiment. We expect a bottom and turnaround in property price from 2H17.
Our rationale for expecting a bottoming and improvement in home prices stems from:
Since 1985, there have been 9 years where the Retail Sales Index (ex-motor vehicles) registered declines. All have occurred in years where property prices are dropping, except in 1991 and 2009. The correlation between home prices and retail spending and the impact it has on sentiment and thereby consumption is therefore significant.
Figure 4: Since 1985, previous declines in retail sales were accompanied by drops in property prices, except on 2 occasions in 1991 and 2009
2. CMT is a market leader in Singapore as a mall operator cum owner, with heavy focus on suburban market with strong catchment crowds, and resilient necessity spending. Its proactive approach in improving shopper experience and strategically located malls have led to it consistently maintain a near full portfolio occupancy, even though the GFC years in 2008-09.
In embracing technology and innovative solutions for improved shopper experience and better operational efficiency, CapitaLand has launched various initiatives, amongst which:
Figure 5: CMT’s proactive strategies in enhancing shopper experience and strategically located malls enabled it to consistently maintain a near full portfolio occupancy