CapitaLand Mall Trust: Strong operator in a challenging environment June 12, 2017

PSR Recommendation: NEUTRALStatus: Target Price: 2.01
  • Expect retail sales to bottom in 2H17 as the economy continues to recover. Sentiment could receive further boost with improving home prices.
  • Largest mall owner in Singapore with a focus on suburban malls that are well integrated into major transport hubs and with near monopolistic locations.
  • Structural challenges remain the e-commerce threat and slowing population growth.
  • Initiate coverage with NEUTRAL rating and DDM-derived target price of $2.01.

Investment Merits

  • Singapore retail sales (ex-motor vehicles) dropped 2.6% in 2016, its worst year since 2009. Following a similarly disappointing 1Q17, we think this is set to bottom and stabilise going forward in 2H17. Singapore’s GDP growth has picked up from what we believe was the inflexion point in 3Q16, driven by strong manufacturing and services data, especially in the electronics and precision engineering clusters. Consumer sentiment should be further boosted by a turnaround in property prices that we opine will happen in 2H17/1H18.
  • Largest mall owner in Singapore, with heavy focus on suburban market with strong catchment crowds, and resilient necessity spending. CMT’s 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. CMT mall valuations also outperformed that of general retail shop space or residential properties from a longer term perspective (since 2002, CMT’s IPO year). CMT suburban malls stand out as a very attractive asset class with their near monopolistic locations, integration into major suburban transport hubs and focus on necessity spending.

Structural challenges:

  • Increasing number of ecommerce sites, more aggressive promotions and increasing ease of shopping online. We expect online spending to continue momentum and account for a bigger proportion of total retail sales going forward. Brick and mortar stores to remain under pressure in the interim as operators catch up and implement measures to improve the overall shopping experience.
  • Declining population growth and aging population in Singapore. A slower population growth versus the 10 year historical average is likely to negatively impact retail spending growth.

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.

 

Company Background

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

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Source:  Company

Investment Merits

  1. Singapore retail sales (ex- motor vehicles) dropped 2.6% in 2016, its worst year since 2009. Following a similarly disappointing 1Q17, we think this is set to bottom and stabilise going forward in 2H17. Singapore’s GDP growth has picked up from what we believe was the inflexion point in 3Q16, driven by strong manufacturing and services data, especially in the electronics and precision engineering clusters. Consumer sentiment should be further boosted by a turnaround in property prices that we opine will happen in 2H17/1H18.

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.

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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:

  1. 14 consecutive quarters of home price fall increasing affordability. Buying sentiment likely improved after government’s first easing of cooling measures in 1Q17.
  2. Dwindling unsold inventory as a result of tapering government land sales since 2011. Demand supported by improving sentiment.
  3. Transaction volumes in 1Q17 have increased 70% YoY. Our talks and channel checks with developers seem to point to a greater hunger for land. They have demonstrated this with four en-bloc sales in the last month. Developers seem to share the same optimism on home prices.

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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

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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:

  1. Harnessing visible light communication (VLC) technology in the malls’ Philips lighting fixtures which are able to detect shoppers’ indoor positioning, This allows for more targeted and personalised marketing messages to be broadcast to shoppers.
  2. Introduction of a fully automated artificial intelligence chatbot in the CapitaStar App which is able to dish out a slew of concierge services such as restaurant booking and ride hailing.
  3. Streamlining goods delivery process by harnessing technology through the In-Mall distribution pilot which shrank delivery time by more than 70%.

Figure 5: CMT’s proactive strategies in enhancing shopper experience and strategically located malls enabled it to consistently maintain a near full portfolio occupancy

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