CMT – OCBC

Fully valued; maintain HOLD

Retail sales turning the corner. The July Retail Sales Index, excluding motor vehicles, registered an increase of 6% YoY and 1.3% MoM. Sales of shopping necessities as well as consumer discretionary, such as watches & jewellery, toiletries and wearing apparel & footwear recorded double-digits YoY growth. We reckon that retail sales for the rest of the year should sustain, bolstered by the upcoming F1 Grand Prix and the Dec festive shopping season. We believe burgeoning tourist arrivals and increasing consumer confidence, on the back of strong domestic GDP growth, will favour CMT’s retail tenants. This view is warranted to the extent that there are no further global economic fallouts taking place in 2H10.

Mixed tone on outlook. CMT has previously retained some S$9.5m or 0.3 S cents per unit of distributable income from 1H10 as a buffer against less than promising 2H10 rental reversions (16.8% of gross rental income are expected to expire in 2H10). As for asset enhancements, construction works for JCube and The Atrium remain in focus, but is expected to contribute to the group’s bottomline only in 2012. On the acquisition front, ION Orchard is still in the midst of stabilization and is unlikely to be released by its sponsor this year. We also take the view that increasing demand for retail assets may already have pushed prices to levels where CMT may find it challenging to acquire further.

Management is also keen to explore greenfield projects. The higher yield-on-cost for development projects must, however, be balanced by the longer gestation period (5-6 years) before yields stabilise. As of now, there are no indications from CMT that it will capitalise on this growth-inducing alternative.

Fully valued; maintain HOLD. CMT malls are strategically located in catchment areas (with an established or growing population), well connected to public transportation systems. While we continue to recognize CMT’s impeccable property selection proficiency and operational management, we believe that the trust is fully valued at current level without further accretive acquisitions or cost-effective development projects. CMT trades at forward yields of 4.9% FY10 and 5.2% FY11, compared to the Retail-REIT industry average of 6.4% and 6.6% respectively. While the broader S-REIT sector is trading at a 3.2% discount-to-book on average, CMT’s market value is markedly 37% above its book value. We are maintaining our HOLD rating with RNAV-derived fair value of S$2.01. Key risks to our view include (1) macro-economic headwinds, (2) rent renewals proving more challenging than expected, (3) lower than-expected tourist arrivals and (4) rising funding costs (interest rate risk and refinancing risk).