CGS-CIMB Research analyst Lock Mun Yee is keeping “add” on Sasseur REIT CRPU at a lower target price of 95 cents from $1 previously after the group released its 1HFY2023 ended June results, indicating a mix of challenges and positive developments.
During the six-month period, the REIT’s 1HFY2023 entrusted management agreement (EMA) rental income totaled $63.5 million, marking a y-o-y decrease of 3.6%. The decline can be primarily attributed to an 8.7% depreciation of the Chinese renminbi (RMB) against the Singapore dollar (SGD).
However, in local currency terms, EMA rental income displayed an encouraging growth of 8% y-o-y. This growth was driven by an in-built 3% annual escalation in rents and a substantial 20.8% increase in the variable income component. The latter was supported by an impressive 20.5% surge in 1H23 outlet sales.
Distribution income to unitholders experienced a modest decline of 1.6% y-o-y, amounting to $41 million. This decline was attributed to higher interest costs and a larger amount of retained income, totaling $2 million.
The payout ratio for 1HFY2023 was 93.3%, resulting in a distribution per unit (DPU) of 3.32 cents.
“We cut our FY2023 to FY2025 DPU by 4.67% to 6.07% to factor in a weaker RMB to SGD exchange rate of RMB 5.20 to $1 (versus RMB 4.90 to $1 previously),” notes the analyst in her report dated Aug 14.
See also: Test debug host entity
The analyst also points out that despite the challenges posed by currency depreciation, Sasseur’s outlet mall sales demonstrated robust growth throughout 1HFY2023.
Portfolio occupancy improved q-o-q to reach 97.2%, and this growth was primarily driven by increased take-up at the Kunming outlet, aided by enhanced F&B offerings. Tenant sales within the portfolio experienced a significant y-o-y surge of 20.5%, reaching RMB 2.25 billion ($413 million).
Lock observes that this is “significantly higher” than China’s overall retail sales growth of 8% in 1HFY2023, according to the National Bureau of Statistics of China.
See also: Maybank downgrades ComfortDelGro in contrarian call over Addison Lee acquisition worries
Notably, the Hefei Outlet exhibited the most notable growth of 30%, driven by a low base in 1HFY2022, whilst Chongqing Liangjiang achieved a remarkable 20.3% rise in tenant sales.
The analyst understands that the REIT effectively managed lease expiries for 2HFY2023, with 90% of these leases already pre-committed.
The REIT’s focus on curating diverse and experiential brand concepts is expected to further enhance shoppers' experience and contribute positively to the REIT's performance. A series of mega sales events planned for 2HFY2023, including the signature anniversary sales, bolsters the REIT’s optimism for the latter half of the year.
Sasseur's gearing stood at 26.2% at the end of 1HFY2023, offering a comfortable level of debt headroom for future growth.
Meanwhile, the REIT has a debt maturity profile of 3.3 years, with no significant refinancing requirements until FY2026.
Notably, approximately 77.2% of its borrowings are pegged to stable rates or hedged into fixed rates.
“We estimate Sasseur has potential debt headroom of around $811.4 million (assuming 50% gearing). This will enable Sasseur to focus on inorganic growth drivers for the REIT, in our view. Within its sponsor portfolio, it has a right of first refusal for the Xian and Guiyang outlets,” adds Lock.
For more stories about where money flows, click here for Capital Section
The analyst likes Sasseur for “its exposure to the more resilient outlet mall segment of the retail value chain” while its EMA rental income structure provides a stable base.
Re-rating catalysts include better-than-projected tenant sales that will boost its variable income component and a highly visible sponsor asset pipeline for inorganic growth.
Conversely, downside risks include a high cost of capital that will erode Sasseur’s positive accretion yield gap, slower-than-expected sales at its outlet malls or a slowdown in discretionary consumption in China , that can lead to declining tenant sales at its outlets.
Shares in Sasseur REIT closed 2 cents lower or 2.83% down at 68.5 cents on Aug 16.
