SINGAPORE (Apr 3): CGS-CIMB Research is initiating coverage on Sasseur REIT (SASSR) with an “add” recommendation and a target price of 92 cents, representing a potential upside of 15%.

This values SASSR at 7.3% FY19F DPU yield, which the brokerage says is still above the average of its comparable peers in Singapore.

“We went to SASSR’s outlet malls and they were packed,” says lead analyst Lock Mun Yee in a Tuesday report, adding that Sasseur is “the first listed outlet mall REIT in Singapore which offers investors exposure to the most rapidly-growing part of the China retail value chain.”

SASSR’s portfolio comprises four assets located in four key Tier 2 cities – Chongqing, Bishan, Hefei and Kunming – with a total net lettable area of 304,573 sq m. The portfolio is valued at RMB 7.7 billion ($1.54 billion) as at end-December 2018.

“We believe Sasseur REIT has a strategically-positioned retail outlet portfolio,” says Lock. Rising urbanisation and growing income levels in the four cities, she says, have led to high discretionary consumption from 2012 to 2016.

“SASSR has first-mover advantage in the prosperous Tier-2 cities of Chongqing, Bishan, Kunming and Hefei to capitalise on expanding private consumption appetite and rising number of middle-income households,” Lock adds. “Our site visits to these busy malls attest to the growing sophistication and aspiration of Chinese shoppers to branded consumerism.”

Similar to a master lease structure, SASSR derives rental income from a lease arrangement called Entrusted Management Agreement (EMA) with the entrusted manager.

The entrusted manager oversees the day-to-day operations, marketing, tenant management and cash collection of the portfolio. Rentals paid to SASSR are based on a mix of fixed rent and a variable component tied to the underlying performance of tenant sales.

“This structure enables SASSR to deliver a balance of stability (with downside protection) from the fixed component and growth through tenant sales performance,” Lock says.

In addition, she believes SASSR’s robust balance sheet allows for the pursuit of acquisition growth.

“SASSR’s gearing was 29% at end-2018, with little refinancing needs in FY19-20F, based on our estimates. As such, we believe it is well-placed to tap inorganic growth opportunities,” Lock says.

SASSR’s sponsor, Sasseur Group, owns two other properties in Xian and Guiyang with a total gross floor area of 335,228 sq m. SASSR has right of first refusal (ROFR) to acquire these two properties. There are also another seven pipeline properties that Sasseur Group manages but does not own.

“Based on the 45% aggregate leverage ceiling, we estimate SASSR has debt headroom of $283 million to fund potential new acquisitions,” Lock says.

The analyst notes that SASSR is currently trading at a 170 basis point spread compared to other retail REITs in Singapore with China exposure, such as CapitaLand Retail China Trust. SASSR is also trading at a 340-370bp spread above other retail SREITs.

“We believe given the faster pace of growth in this market segment, SASSR should close the gap between relative to its peers over time,” Lock says.

As at 12.30pm, shares in Sasseur REIT are trading 2.6% higher at 80 cents. This implies an estimated price-to-earnings ratio of 13.1% and a dividend yield of 8.5% for FY19.