More positive data from GSS. According to data from MasterCard, spending by local MasterCard holders during the first weekend (May 29 to 31) of the Great Singapore Sale (GSS) had increased by 7% YoY to US$26.3m. Including spending by tourists, sales increased by a smaller 1% YoY to US$37.5m and this was due to lower tourist arrivals. Nevertheless, spending by locals still represents a higher proportion of the retail spending and the improvement in spending sends a positive signal that consumer sentiment continues to improve after hitting a low in February.
Easing pressure on retailers and landlords. Even though the economic outlook remains uncertain, we believe that the initial stage of fear among consumers has now passed and small-ticket item spending by local consumers is now picking up, as seen in the recent retail sales data. This momentum has continued into May as supported by data from MasterCard. This bodes well for retailers that had been facing pressures from declining sales and rising operating costs since 2H08. To retail landlords such as CapitaMall Trust (CMT), concerns on tenant eviction and rising tenant turnover would also ease.
No catalyst in sight yet; maintain HOLD. While we believe that the worst could be over for the retail industry, we expect the recovery in consumer spending to be gradual as consumers are likely to stay cautious in light of the uncertain economic outlook. As such, we maintain our forecast of a 10% decline in rent for FY09 and a 5% decline in rent for FY10. Our RNAV estimate remains at S$1.36 per unit. We also expect mid-year revaluation of the retail malls to remain stable. After the Rights issue, its gearing level will decline to 29.1% after the repayment of borrowings and we estimate that CMT's asset portfolio can tolerate up to an 18% decline in valuation before it reaches the upper bound of its comfortable leverage target of 30%-35%. Our fair value of CMT remains at S$1.21 and we maintain our HOLD rating.
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