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Analysts recommend investors 'buy' Sasseur REIT on improving tenant sales

Felicia Tan
Felicia Tan • 4 min read
Analysts recommend investors 'buy' Sasseur REIT on improving tenant sales
Units in Sasseur REIT closed 0.5 cent higher or 0.6% up at 80 cents on Nov 19.
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Analysts from CGS-CIMB, DBS Group Research and Maybank Kim Eng are recommending investors to “add” or “buy” units in Sasseur REIT. KGI Research, similarly, has rated “outperform” on the REIT due to its better-than-expected 3QFY2020 results.

On Nov 13, the manager of Sasseur REIT reported 3QFY2020 distribution per unit (DPU) of 1.764 cents, up 7.6% y-o-y and 16.7% q-o-q.

The quarter’s entrusted manager agreement (EMA) rental income of $32.6 million was up 11.6% y-o-y and 7.6% q-o-q.

The higher figures were mainly due to sustained recovery in sales and a slight strengthening of the Chinese RMB.

For DBS analysts Geraldine Wong and Derek Tan, the REIT may well be one of the first retail REITs to post a y-o-y growth in DPU.

See: Sasseur REIT records 'strong first-day sales' of $9.5 mil after China's re-opening

“This is by virtue of the escalation that is built into the EMA rental structure and strong recovery in tenant sales to 90% of pre-COVID levels,” they note.

“Sasseur REIT currently trades at an attractive forward yield of 8.2% with further DPU upside from higher variable EMA rents which we have not priced into our current estimates,” they add.

Tenant sales also saw a 33% improvement q-o-q to RMB1.11 billion ($227.3 million), which has led Wong and Tan to believe that Sasseur REIT is “on track” to exceeding their tenant sales estimates.

This, they say, is supported by strong pent-up demand. The prevention of outbound travel has also led Chinese consumers to channel their expenditure towards retail instead.

Looking ahead, the analysts expect further sales growth for the 4QFY2020 due to the sale of pricier winter items and several key shopping events such as the Singles Day and Christmas sales.

Wong and Tan also expect tenant sales in FY2021 to head back toward pre-Covid-19 levels seen in FY2019, although they are still keeping their tenant sales estimates “conservative”.

“Our top-line rental revenue is in conjunction with a 15% y-o-y dip in tenant sales for FY2020 (as opposed to a previous growth forecast of 5- 15%) to account for an approximate two-month temporary closure period this year,” they say.

Wong and Tan have thus upped their target price on the REIT to 90 cents from 80 cents previously after “rolling forward valuations into FY2021”.

CGS-CIMB’s Lock Mun Yee and Eing Kar Mei, likewise, have upped their target price to 84.5 cents from 84 cents previously.

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Lock and Eing have also increased their DPU estimates for FY2020F-FY2022F from 0.34%-1.06%, as they expect continued strong retail sales and interest cost savings to underpin 4QFY2020 earnings.

Sasseur REIT’s asset enhancement initiatives (AEIs) at its Chongqing and Hefei outlet malls, which are on track to completion in 1Q to 2QFY2021, should “result in some income uplift” for the REIT, say Lock and Eing.

“We reiterate our ‘add’ rating as we believe the long-term uptrend for outlet malls is still intact in China. Potential re-rating catalyst: better-than-projected tenant sales. Downside risks: slowdown in discretionary consumption due to weaker economic outlook,” they add.

Maybank Kim Eng’s Chua Su Tye has, similarly, upped his target price marginally to $1 from 95 cents previously, and raised his DPU estimates on the back of the REIT’s better-than-expected performance.

The REIT’s 9MFY2020 DPU stands at 77% of Chua’s full-year estimates.

On that, Chua says he sees the strong sales momentum extended into the 4QFY2020 and FY2021 due to improving occupancies as a result of the REIT’s AEIs and portfolio sales growth.

Contributions from the REIT’s potential acquisitions as well as a strong balance sheet and visible pipeline are also contributing factors that may up its unit price, he says.

KGI’s Joel Ng is the only analyst of the four brokerages to maintain his target price of 89 cents, citing a “conservative set of dividend discount model (DDM) assumptions” factoring in 9.0% cost of equity (COE) and 2.0% terminal growth.

See: As Chinese retail REITs struggle, CRCT's Tan outlines plans to stabilise DPU

“Sasseur’s 27.8% debt gearing puts it in a good place to withstand asset price volatility while providing $828 million of debt headroom (based on 50% gearing limit) to embark on AEI,” he says.

Ng also views China’s global lead in economic recovery as a plus for the REIT.

“China’s export growth y-o-y hit a y-t-d high in October despite a slowdown in pandemic-fighting product exports, pointing to a healthy trend of global economic recovery,” he notes.

“Although the pandemic is intensifying in multiple countries, prompting some to launch more restraints on economic activity in November, this round of lockdowns will only slow economic improvement rather than reversing global economic recovery, as vaccine development is almost completed and Covid-19 treatment know-how has made great strides,” Ng adds.

Units in Sasseur REIT closed 0.5 cent higher or 0.6% up at 80 cents on Nov 19.

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