Sasseur REIT - UOB Kay Hian 2022-02-23: Sustainable Growth With Lowest Gearing In 4Q21


Sasseur REIT - Sustainable Growth With Lowest Gearing In 4Q21

  • Sasseur REIT is a pure play on growth in domestic consumption and the middle income population in China. According to management, tenant sales have rebounded with the arrival of colder weather in 1Q22. Yield-accretive acquisitions would enhance scale and trading liquidity.
  • Sasseur REIT provides an attractive 2022 distribution yield of 8.8% and trades at P/NAV of 0.87x. Maintain BUY. Target price: S$1.12.

Sasseur REIT's 4Q21 Results

  • Sasseur REIT (SGX:CRPU) reported 4Q21 DPU of S$0.019 (down 1.8% y-o-y but up 3.8% q-o-q), bringing 2021 DPU to S$0.07104 (+8.5% y-o-y). It retained distributable income of S$2.2m in 4Q21 and S$7.7m in 2021 to finance asset enhancement initiatives and working capital purposes. Excluding the retention, 4Q21 DPU would be 2.079 cents, representing an increase of 7.4% y-o-y. Payout ratio was 91.8% in 2021.
  • Normalisation in domestic consumption. The 4 outlet malls generated tenant sales of RMB1,161.9m in 4Q21, a significant rebound of 16.6% q-o-q. Sasseur REIT benefitted from robust consumption in Chinese cities and intensive promotional efforts in collaboration with tenants. Unusually warm winter has, however, affected sales of higher value winter fashion and accessories, resulting in a 6.8% y-o-y decline in tenant sales.
  • Constant renewal of tenants’ trade mix. Portfolio occupancy improved 0.8ppt q-o-q to 94.5% in 4Q21. Chongqing Liangjiang Outlets completed its asset enhancement initiatives in Dec 21 and occupancy maintained at 100%. Its outlet malls at Chongqing Bishan, Hefei and Kunming all recorded higher occupancies. Sasseur REIT diversified its trade mix by introducing more F&B, beauty and healthcare tenants. Watsons opened a new store with floor area of 220 sqm at its Chongqing Bishan Outlets.
  • Benefitted from strength of the renminbi and lower cost of debt. Entrusted Management Agreement (EMA) rental rebounded 5.3% q-o-q but dipped 0.5% y-o-y in 4Q21. Fixed component expanded at a steady pace of 3% y-o-y. Variable component registered sequential expansion of 17.8% q-o-q but nevertheless contracted 6.8% y-o-y. Sasseur REIT benefitted as the renminbi strengthened 4.7% against the Singapore dollar in 2021.
  • NAV boosted by strength of the renminbi. Sasseur REIT has recognised gain in fair value of its investment properties of S$62.4m in 2021. NAV/unit increased 8.2% y-o-y to S$0.99 as the renminbi strengthened 4.7% against the Singapore dollar.

Lowest gearing among S-REITs.

  • Sasseur REIT’s aggregate leverage dipped 1.8ppt y-o-y to 26.1% in 4Q21, the lowest among S-REITs. The low gearing provides ample debt headroom of S$952m based on the Monetary Authority of Singapore’s (MAS) limit on aggregate leverage of 50%. The strong balance sheet provides flexibility to pursue yield-accretive acquisitions.
  • Lower cost of debt. Interest expense declined 20% y-o-y as weighted average cost of debt was reduced by 0.5ppt y-o-y from 4.9% to 4.4% (includes borrowing-related fees). Thus, interest coverage ratio has improved from 4.0x to 5.1x.

China re-orientates towards domestic consumption.

  • China is expected to prioritise expanding domestic consumption and promoting the rapid development of hi-tech industries in its 14th Five-Year Plan (2021-25). The external environment has become more complicated and unpredictable, while trade relations with the US remain uncertain. The re-orientation towards promotion of domestic demand and consumption will steer the Chinese towards spending on goods and services produced domestically, which will benefit Sasseur REIT’s outlet malls.
  • Limited impact from China’s dynamic zero COVID-19 strategy. China practices a targeted approach called dynamic clearing whereby restrictions cover just a district, neighbourhood or building. Lockdown for an entire city is an exception rather than the norm. Dynamic zero COVID-19 strategy does not mean China targets zero infection. Rather, it means China imposes a slew of measures to swiftly stamp out new outbreaks. Most localities do not undergo restrictions. For localities that experienced new cases of infection, local residents are inconvenienced by the tough restrictions for only a short period of time.

Pursuing yield-accretive acquisitions.

  • Sponsor Sasseur Group has opened its 14th outlet mall with GFA of 77,843sqm at Suzhou in Oct 21. Management highlighted outlet malls in Xi’an (GFA: 141,708sqm) and Guiyang (GFA: 193,520sqm) within its sponsor pipeline. Sasseur REIT has right of first refusal to acquire the two large scale outlet malls with good long-term growth potential.

Sasseur REIT - Earnings revision & recommendation

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-02-23
SGX Stock Analyst Report BUY MAINTAIN BUY 1.12 UP 1.050