Sasseur REIT - UOB Kay Hian 2020-08-17: 2Q20 Rapid Recovery In Outlet Sales


Sasseur REIT - 2Q20 Rapid Recovery In Outlet Sales

  • China’s success in managing the COVID-19 pandemic has sped up its economic recovery, which Sasseur REIT was able to ride on. Sasseur REIT’s four outlet malls achieved a strong 56% q-o-q recovery in sales, and we expect the growth momentum to extend into 2H20. Chinese consumers have a penchant for affordable branded goods offered by outlet malls and Sasseur REIT is benefitting from pent-up demand and “revenge” shopping.
  • Sasseur REIT provides attractive 2021 distribution yield of 8.6% and trades at P/NAV of 0.9x.
  • Maintain BUY on Sasseur REIT with target price of S$0.99.

Sasseur REIT's 2Q20 Results

  • Sasseur REIT (SGX:CRPU) reported 2Q20 DPU of 1.512 S cents (-6.0% y-o-y), bringing 1H20 DPU to 2.846 S cents (-12.8% y-o-y). 1H20 represented 46% of our 2020 DPU forecast. Results are in line with our expectations as the negative impact from the 7-week closure of outlet malls in 1Q20 was already baked into our forecast.

Outlet sales show signs of steady recovery.

  • Total outlet sales for the four malls were Rmb835.7m in 2Q20, which is 56.3% higher q-o-q and represents a swift recovery on a sequential basis. Total sales for 2Q20 was Rmb396m for Chongqing (+70.3% q-o-q), Rmb78.6m for Bishan (+51.5% q-o-q) and Rmb217.7m for Hefei (+69.6% q-o-q).
  • Sasseur REIT benefitted from pent-up demand and “revenge” shopping as the Chinese economy recovers from strict lockdowns earlier in the year.

Portfolio occupancy remained resilient at 93.6% (-1.2ppt q-o-q).

  • Occupancy for 2Q20 was 100% for Chongqing (flat q-o-q), 94.7% for Hefei (-0.8ppt q-o-q) and 97.3% for Kunming (+1.3ppt q-o-q). Occupancy for Bishan eased 2.3ppt q-o-q to 84.2% due to bunching up of lease expiry. Sasseur REIT’s total VIP members increased by 14.1% ytd to 1.8m despite the COVID-19 pandemic.

Variable component of EMA rental income has rebounded.

  • Sasseur REIT’s Entrusted Management Agreement (EMA) model provides downside protection from sales volatility as the fixed component income comprises approximately 70% of resultant rent with an annual step-up of 3%. For 2Q20, the variable component of EMA rental income increased 55.4% q-o-q to Rmb38.5m, reflecting the strong rebound in shopper traffic and tenant sales.
  • Sasseur REIT is maintaining its payout ratio at 100% and did not retain any cash.

Low gearing and healthy balance sheet.

  • Sasseur REIT’s aggregate leverage stood at a healthy 28.1% (down 0.4ppt q-o-q) in 2Q20. Interest coverage ratio also remains healthy at 5x. Debt headroom has increased to S$387m (vs S$305m in 4Q19) due to the recent relaxation of leverage limit from 45% to 50% for S-REITs, which provides Sasseur REIT with more flexibility to pursue yield-accretive acquisitions.

Chinese governments’ push for domestic consumption.

  • Given the unpredictability of the external environment and frosty trade relations between trade partners, such as the US, the Chinese government has sent strong signals encouraging and promoting domestic consumption among its citizens.
  • In addition, the prolonged travel restrictions will also steer people to spend domestically, which will benefit Sasseur REIT’s outlet sales.

Affordable branded goods well liked by Chinese consumers.

  • The bulk of Sasseur REIT’s customers come from the Chinese middle-class, which is more price-sensitive given the current uncertain economic climate. As such, they are drawn to outlet malls, which offer value-for-money branded goods at a fraction of the price of regular retailers. This will help accelerate the recovery of sales at Sasseur REIT to pre-pandemic levels.

AEI initiatives are underway

  • AEI initiatives are underway for Sasseur REIT’s Chongqing and Hefei outlets, which will enhance the shopping experience at these outlet malls. For the Hefei outlet, the traffic driveway will be converted to a pedestrian walkway to improve the connectivity between both Block A and Block B. Block B will be refurbished to cater for international sports brands. The AEI is expected to complete by 1Q21.
  • For the Chongqing outlet, which is Sasseur REIT’s oldest mall, major AEI works are in progress and expected to boost asset yield. The outlet’s interior will be retrofitted and refurbished to refresh overall aesthetics. Retail units and floor plates will be re-configured to increase efficiency and improve rentals. The AEI is expected to complete by 2Q21.

Sasseur REIT - Valuation & Recommendation

Nicola Ho UOB Kay Hian Research | Jonathan Koh CFA UOB Kay Hian | https://research.uobkayhian.com/ 2020-08-17
SGX Stock Analyst Report BUY MAINTAIN BUY 0.99 UP 0.950