Sassuer REIT - CGS-CIMB Research 2019-04-02: Brand Experts (Financial Analysis, Valuation & Recommendation)


Sassuer REIT - Brand Experts (Part 2 ~ Financial Analysis, Valuation & Recommendation)


A strong player in the retail industry

  • Sasseur REIT (SGX:CRPU)'s sponsor Sasseur Group, which is also the REIT's entrusted manager (EM), has been involved in the retail industry in the past 28 years and has built up strong relationships with brand owners. With 1,770 brand names in its database, the EM would be able to change each asset's tenant mix according to consumer demand and preference. We believe the strong relationship with the tenants/brand owners and active management of the malls had and will continue to support the malls in recording impressive sales growth.
  • We believe Sasseur REIT is in the sweet spot of the retail industry as outlet malls target the growing middle-income consumers who prefer higher quality branded goods but at lower pricing. We believe all the REIT’s malls are well-positioned in the tier-2 cities, which mainly consist of middle-income consumers. Compared to other traditional malls, outlet malls are more resilient in the face of competition from e-commerce and during an economic downturn, in our view.
  • However, we believe the high return of the outlet mall industry will consistently attract competition from new players. Acquisition of a mall is also capital intensive. Hence, the REIT needs to have a strong balance sheet, in our view.
  • While Chinese outlet malls receive strong demand from the local consumers, it is more difficult to attract overseas shoppers due to the presence of luxury goods import tax which makes the luxury products in China more expensive.


Exposure to foreign exchange risk.

  • Sasseur REIT derives its revenue from Rmb-denominated dividend income which is then converted to Singapore dollar for distribution payments to the unitholders. Any significant appreciation or depreciation of the Singapore dollar against the renminbi may cause the REIT to incur foreign exchange gains or losses.
  • The renminbi is also not freely convertible and there are significant restrictions on the remittance of renminbi into and out of China. There is no assurance that the current policies regarding payment of dividends in foreign currencies will continue in the future.
  • However, downside protection will only last for two consecutive years and will cease thereafter. Unitholders will also face currency translation risk as dividends are received in Singapore dollar.

Geographical concentration in China.

  • The entire portfolio is focused on properties in China and will be highly dependent on the economic, operating and regulatory environment in China. Growth in the China has slowed and future growth of the economy is subject to many factors beyond the REIT’s control.
  • Weak economic growth could flow through to consumption and retail sales, thus negatively impacting Sasseur REIT’s income, in our view.

Lease expiry risk, volatility in rents from tenant sales fluctuations.

  • The portfolio Weighted Average Lease Expiry (WALE) by rental income at end-Dec 2018 is 1.3 years with 73.7% of leases expiring in 2019. Sasseur REIT’s variable rental component may be negatively impacted if a significant number of tenants do not renew their rents and the REIT is unable to find suitable replacement tenants. This can be partly offset by the fixed rent component which made up 61% of 4Q18 and 65% of FY18 EMA rental income.
  • Under the agreement with its sponsor, the latter will pay a minimum of Rmb611.4m of EMA rental income in FY19F should the fixed and variable rents not exceed the minimum rent.
  • Beyond FY20, the sponsor will pay the FY19 minimum rent if the aggregate EMA resultant rent in any two consecutive years does not exceed Rmb611.4m.

Dependent on Entrusted Manager for income.

  • The entirety of Sasseur REIT’s income comprises the EMA Rental Income which is derived from the Entrusted Manager, Sasseur Shanghai (Unlisted). Consequently, the REIT’s ability to make distributions will depend on the ability of Sasseur Shanghai to deliver on its obligations including the rental payments to the REIT. Therefore, Sasseur REIT is exposed to the operational and management risk of Sasseur Shanghai.


FY18 results highlights

  • Sasseur REIT reported 4Q18 distribution income of S$23.6m (DPU: 1.999 Scts), which exceeded its IPO forecast by 28.1%. This was achieved on a 2.9% outperformance in EMA rental income as well as better cost management from lower IPO transaction costs.
  • For the period of 28 Mar 2018 (when it was listed) to 31 Dec 2018, Sasseur REIT reported distribution income of S$60.5m (DPU: 5.128 Scts), 12.6% ahead of its projection, as EMA rental came in 2.2% ahead of projection.
  • EMA rental income was boosted by higher variable component as portfolio sales came in 7.9% ahead of management’s forecast, and an increase of 27.6% y-o-y. Growth was strongest in Hefei and Kunming due to a low base y-o-y, as business ramped up. Meanwhile, the Chongqing mall continued to deliver double-digit sales growth of 12.1%. Portfolio occupancy ticked up to 95.2% at end-Dec 2018.

Projected stronger tenant sales growth

  • We expect Sasseur REIT to post full-year distribution income of S$80m for FY19F and S$88.5m for FY20F on the back of strong tenant sales at its properties, thanks to the ramping up of its young portfolio and the strategic locations of its properties.
  • We project tenant sales at its Chongqing outlet mall to increase 6% p.a. while the other outlet malls, i.e. in Hefei, Kunming and Bishan, should expand 20-38% p.a. over 2019-2021F. This will underpin Sasseur REIT’s earnings growth. We have not included any new acquisitions in our current forecasts.
  • Based on our estimates, the variable component should account for 43% of FY21F rental income vs. 37% for FY19F, to be driven by the improved performance from its smaller properties such as the Hefei and Kunming outlet malls.
  • Marketing strategies to lift sales include boosting memberships as well as regular thematic events such as National Day Promo, Red Friday Promo and Year-End Double Promo. New member registrations grew 78.5% y-o-y in 2018, bringing the total number of members to 819,200m.

Marginal capex requirements

  • Given the relative young age of its properties, we do not expect Sasseur REIT to have major capex requirements over the next 2-3 years. Apart from its strategy to increase the number of VIP members and raise the occupancy rate of its Bishan and Kunming outlet malls, it would capitalise on asset enhancement initiatives (AEI) such as building a super farm in Hefei, in our view.

Visible pipeline from sponsor

  • Sasseur REIT’s growth strategies include activities that would drive organic growth such as actively managing its brand relationships, tenancy mix, renewals and new leases to maintain high tenant retention levels for key brands that perform well while bringing in new brands to refresh its offerings, support growth and minimise vacancy periods.
  • Sasseur REIT also undertakes proactive retrofitting and refurbishment works to achieve increases in rental revenue and occupancy rates, and to update the shopping experiences offered to customers. It is also keeping an eye out for inorganic expansion prospects. According to its IPO prospectus, Sasseur REIT is identifying quality income-producing properties used for retail outlet mall purposes, initially in China and thereafter in other countries.
  • Sasseur REIT will benefit from the sponsor’s pipeline of properties, to which it has the right of first refusal (ROFR). Sasseur REIT has a ROFR on two properties, in Xi’an and Guiyang, which were opened in 2H17, and the sponsor has another seven properties which it manages but does not own. These nine properties represent c.1.25m sq m of GFA, which is more than twice Sasseur REIT's current portfolio GFA.
  • Assuming an optimal aggregate leverage of 45%, Sasseur REIT would likely have further debt headroom of S$283m, based on our calculations. This will enable the REIT to tap its sponsor’s pipeline, in our view.

Robust balance sheet metrics

  • Sasseur REIT’s capital management strategies include matching the maturity of its indebtedness with the maturity of its investment assets. Its EM also aims to utilise currency risk management strategies, like hedging, to minimise exposure to volatility in foreign exchange rates. It will also strive to use foreign currency denominated borrowings to match the currency of the asset investments as a natural currency hedge.
  • As at end-FY18, Sasseur REIT’s aggregate leverage stood at 29%, with interest cover at 4.1x. Weighted average debt maturity is 3.75 years. About 75.6% of its total debt are onshore facilities and the remaining are offshore. Total average debt cost is 5.4% (Rmb-denominated onshore loans: 5.7%, S$-denominated offshore loans: 4.5%). About half of its Singapore dollar interest rate exposure has been hedged.

Quarterly dividend distribution frequency

  • Sasseur REIT has changed its dividend frequency from semi-annual to quarterly from FY19. This will provide unitholders with a more regular source of dividend income.

Valuation & Recommendation

  • We value Sasseur REIT using DDM methodology given that 65% of its FY18 revenues are generated from a stable EMA arrangement. We have assumed a cost of equity of 11.3%, based on a terminal growth rate of 3%, beta of 0.8x and China risk-free rate of 3.2%.
  • Our DDM pegs Sasseur REIT’s target price at S$0.92. In terms of sensitivity, for every 0.05x change in beta, our DDM valuation for Sasseur REIT would shift 5.8%, while a 0.5% change in cost of equity would similarly move our DDM valuation by 5.8% and a 0.5% change in terminal growth would alter our DDM by 4.8%.
  • In comparison with other retail S-REITs, Sasseur REIT is currently trading at a 170bp spread vs. retail S-REITs with China exposure such as CAPITALAND RETAIL CHINA TRUST (SGX:AU8U) and at a 340-370bp spread above other retail S- REITs. We believe given the faster pace of growth in this market segment, Sasseur REIT should close the gap between relative to its peers over time. See attached PDF report for S-REITs peer comparison table. 
  • At our target price of S$0.92, we value Sasseur REIT at 7.3% FY19F DPU yield, which is still above the average of its comparable peers in Singapore.
  • In the longer run, we anticipate the yield gap to narrow as Sasseur REIT’s AUM continues to grow or with a more visible execution track record.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | Ervin SEOW CGS-CIMB Research | 2019-04-02
SGX Stock Analyst Report ADD MAINTAIN ADD 0.92 SAME 0.92