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'Buy' Sasseur REIT as buying sentiments improve in China

Samantha Chiew
Samantha Chiew • 4 min read
'Buy' Sasseur REIT as buying sentiments improve in China
As Chinese consumers are hunting for bargains at Sasseur REIT, analysts are recommending investors to snap up the stock.
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Analysts are upbeat on Sasseur REIT as Chinese consumers are turning to retail therapy as the economy in China gradually reopens.

In 2Q20, the manager of Sasseur REIT said that its portfolio of four outlet malls in China delivered higher sales, rental income, and distributable income for 2Q20 (compared to 1Q20), showing positive signs that its business recovery is “firmly underway”.

The manager of Sasseur REIT has declared a distribution per unit (DPU) of 1.512 cents for 2Q20 ended June, 6% down from the 1.608 cents posted in 2Q19, but 13.3% higher from 1Q20’s 1.334 cents.

This brings the REIT’s 1H20 DPU to 2.846 cents, some 12% lower than the DPU of 3.264 cents in 1H19.

See: Sasseur REIT's 2Q20 DPU falls 6% to 1.512 cents, says business recovery is 'firmly underway'

In an August 14 report by CGS-CIMB Research, analyst Lock Mun Yee says, “Although total outlet mall sales fell 18.6% y-o-y to RMB 835.7 million in 2Q20, it was a commendable 56.3% recovery from 1Q20. The largest q-o-q pick-up in sales came from the Chongqing (+70.3%) and Hefei (+69.6%) outlet malls, while the Bishan and Kunming outlet malls delivered a 51.5% and 17.7% q-o-q sales growth respectively.”

Portfolio occupancy dipped slightly to 93.6% at end-2Q, with 1,153 tenants, even while VIP membership increased about 9% q-o-q. Against this backdrop, EMA rental income grew 10.7% q-o-q, with the variable component making up 27% of the topline.

The REIT has a remaining 44.9% of net lettable area to be renewed in 2H20. With major sales events planned for its anniversary sales, held annually in September, management expects robust leasing take-up for its upcoming renewals.

Meanwhile, the REIT is seeing its asset enhancement initiatives (AEI) progressing well for its malls. And with a low gearing of 28.1%, the analyst believes that the REIT can continue to explore yield-accretive inorganic growth opportunities.

The analyst has kept her “add” call on the stock as she believes the long-term uptrend for outlet malls is still intact in China. She has an increased target price of 84 cents from 80 cents previously.

In a similar fashion, Maybank Kim Eng continues to rate Sasseur REIT a “buy” with an unchanged target price of 95 cents.

In an August 14 report, analyst Chua Su Tye says, “We expect sales growth to gain traction in the seasonally-stronger 2H20 against improving occupancies, and supported by its September-anniversary sales events. We see catalysts from better-than-expected portfolio sales and contributions from potential acquisitions, backed by a visible pipeline and $387 million debt headroom.”

With its current debt headroom, the analyst expects the REIT to eye sizeable acquisitions, backed by a visible medium-term pipeline from its sponsor’s growing property portfolio - two right of first refusal (ROFR) assets and nine others that could boost its gross floor area (GFA) by 4 times.

Chua believes that management is likely eyeing deals beyond China, as third-party opportunities arise post-Covid outbreak.

Also positive on Sasseur REIT’s outlook is KGI Securities, as it expects the REIT to meet full-year projections and provide an attractive dividend yield of 7.7% in FY20.

The research house has an “outperform” rating on Sasseur REIT with a target price of 89 cents, as it believes the worst is over for the REIT.

In an August 17 report, analyst Joel Ng says, “We think there could be DPU upside if management can continue to take advantage of lower interest rates. So far, it has done a good job of bringing down weighted average cost of debt to 4.17% in 2Q20, an improvement from 4.41% in 4Q19.”

Currently, the REIT is in the final stage of refinancing a $125 million offshore loan due March 2021, which is based on a floating rate pegged to Singapore SOR. Although gearing increased slightly to 28.1% in 2Q20, it is still in a comfortable level compared to the peer average of 35% to 40%.

“While we believe Sasseur’s team has performed well to navigate the disruptions and economic slowdown, it is still not out of the woods yet,” warns Ng.

July 2020 retail sales in China fell 1.1% y-o-y, which means retail sales would have declined every month year-to-date. The concern now is that China’s 2Q20 GDP growth could have been driven by pent-up demand, and performance may not repeat going forward. Specifically, the jobless rate for college graduates rose to 19% in June and may exert pressure on the consumer sector.

Units in Sasseur REIT closed at 78 cents on Aug 17, giving it an FY20 price-to-book ratio of 0.88 times, with a dividend yield of 7.7%.

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