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Morningstar | Kiwi Has More Work to Make its Smaller Malls More E-Commerce Resilient. FVE Unchanged at NZD 1.40. See Updated Analyst Note from 24 Sep 2018

Our fair value estimate is unchanged at NZD 1.40 for narrow-moat-rated Kiwi Property Group. New Zealand economic conditions remain supportive of Kiwi Property's portfolio of retail shopping centres, the firm's largest asset class at 68% of total assets. New Zealand economic growth over the 12 months to June was solid at 2.8%, and median wages are up 2.9%. This should provide a small top-up to household budgets given these are both well ahead of consumer price growth of 1.5%. We see the New Zealand economy growing solidly for the foreseeable future, key drivers being solid net inbound migration, a weather-driven recovery in agricultural production and tourism where arrivals have risen by around 9% per year for the past three years.

While there is a solid growth outlook for consumer spending, Kiwi will not be capturing all benefits through higher in-mall sales and rents. The shortfall is due to further leakage of traditional bricks-and-mortar sales to e-commerce retailers. At present, e-commerce is a still minor factor in the retail landscape at 8% of total retail sales or 11% of sales if food and liquor sectors are excluded. However, online retail will grow, eroding some of the spending growth in the broader retail market. The divergence is clearly evident in the sales disparity, with online retail sales for July 13% higher than the same period a year ago, materially ahead of the comparable 3% growth in traditional retailing.

Online sales penetration will undoubtedly be much higher in 10 years, but will trail that of global cities due to the high transport costs as a large portion of New Zealand households reside outside the major cities. We already account for the e-commerce headwind by forecasting retail sales and hence retail rent growth will moderate over the longer term to approximately 2.5% annually.

We think Kiwi is appropriately responding to the e-commerce challenge, by investing to expand the dining and entertainment precincts. This promotes higher visitation rates, longer dwell times that collectively drive sales. To date, redevelopment efforts have focused on Sylvia Park, Auckland, the firm's largest asset by value at NZD 835 million or 28% of the total portfolio. But increased focus is required on the remaining retail assets to improve their resilience to the e-commerce trends.