The retail outlook looks set to worsen as consumers brace for higher unemployment and wage cuts. Prime Orchard Road rents were down 1.9% qoq in 4Q08 to S$36.10 psf and prime suburban rents fell 1% qoq to S$29 psf. Retail rents proved resilient during previous downturns, but the decline may be sharper this time as 5.1m sq ft of retail space is due for completion in 2009-10 vs pa demand of 270,000 sq ft in the past decade. We assume retail rents decline 20% (from 15%) in FY09 and 15% (from 10%) in FY10. This reduces our net profit forecast 7% for FY09 to S$193m and 11% for FY10 to S$180m.

We believe CMT may need to raise capital, given its high gearing of 43%. The company risks a rating downgrade if gearing exceeds its target of 45%. Higher gearing could result from asset devaluation, due to sliding retail rents and cap rate expansion, albeit by a mild 25-50bp on our estimates. Recapitalisation, possibly through equity raising, would be negative in our view as CMT is trading at a significant 28% discount to its September 2008 NAV of S$2.39.

We see low refinancing risk for CMT as it enjoys a Moody’s rating of A2, the highest among S-REITs. S$150m of debt that matured in December 2008 was refinanced at 3-4%. Refinancing terms for S$754m of debt (24% of total) maturing mostly in August will be in place by early 2009, according to management. We predict CMT's average funding cost will increase slightly, from 3.4% to 3.8%, assuming a refinancing spread of 250-300bp. We estimate DPU will dip only 5.1% in this scenario.

We cut our TP to S$1.85 (from S$2.00) on our profit downgrade, but upgrade to Hold (from Sell) due to the stock price correction. We forecast yields of 7% in both FY09 and FY10. The stock trades at a 28% discount to its NAV of S$2.39 as of September 2008.