SINGAPORE (June 11): KGI Securities is initiating coverage on Sasseur REIT with an “outperform” recommendation and a target price of 89 cents.
In a Thursday report, analyst Joel Ng says, “While Sasseur's 1Q20 DPU declined 19% y-o-y due to the lockdown measures in China, the REIT's long-term growth is underpinned by growing middle income spend, and in fact, may surprise on the upside going into 2H20 as government policies spur spending.”
See also: Sasseur REIT posts 19.4% drop in 1Q20 DPU to 1.334 cents
Sasseur has a unique business model which offers investors upside potential with a variable component linked to 4.0% to 5.5% of total sales of its four outlet malls while providing downside protection with a fixed income component that increases 3.0% per annum until 2028.
Although structured as a REIT, Sasseur generates its rents mainly through a sales-based system whereby tenants pay an agreed percentage of their sales revenue to the sponsor. Sasseur, therefore, allows investors to invest into a proxy of China's outlet retail spending, the country's fastest-growing retail segment.
Additionally, its four outlet malls are located in the fast-growing Tier-2 cities of Chongqing, Hefei and Kunming. Demand is primarily driven by China's growing disposable income per capita.
E-commerce may be booming in China and causing disruption to traditional retail malls, but this should not be a threat to Sasseur as many shoppers are still reluctant to buy big-ticket items – items that cost above RMB1,000 (S$195.898) – online.
Hence, Sasseur has managed to thrive despite the disruption to the retail industry, as it ensures that all the products at its outlet malls are genuine, with harsh penalties imposed on merchants found selling counterfeit goods.
As Covid-19 cuts into overseas trips spending, domestic shopping by residents may potentially get a lift, helped by supportive government policies. China's Labour Day holidays in May 2020 showed the government's willingness to boost local consumption. Also, the CNY’s decline against the USD and JPY may incentivise shoppers to spend on domestic activities.
Sasseur’s outlet malls are not just for shopping. They are designed such that it offers shoppers a holistic experience, with activities such as an indoor zoo, children's playgrounds, and sports concepts, which also gives Sasseur an upper hand over e-commerce.
“As such, we believe that Sasseur's malls stand to recover quickly post the 44-49 days lockdowns of its malls in 1Q20,” says Ng.
While 1Q20 sales declined 56% y-o-y to RMB535 million and resulted in a 19% y-o-y drop in DPU, Sasseur has opted to pay 100% of distributable income and has not retained any cash. The analyst believes that this is only possible as the REIT's occupancy was stable at 95% (a slight decline of 1.2% pts), and shows the positive momentum that management sees going into 2Q20.
As at 11.45am, units in Sasseur REIT are trading at 79 cents or 0.9 times FY20 book with a dividend yield of 7.5%.
