• Sasseur REIT’s 4Q18 DPU of 1.999 Scts exceeds expectations. 
• Strong tenant sales (up 16% y-o-y) in 4Q18 and DPU boosted by absence of need to set aside statutory reserves. 
• Expect strong tenant sales to be maintained with three out of four malls still relatively immature. 
• Post revaluation gains, 29% gearing provides debt headroom for yield-accretive acquisition. 

Unique Exposure to Rapidly Growing China Outlet Mall Industry

• We maintain our BUY call with a revised Target Price of S$0.97 as we remain bullish on SASSEUR REIT (SGX:CRPU)’s prospects given its exposure to the fast-growing Chinese outlet mall industry which is projected to grow at a CAGR of 24% from 2016-2021 via its initial portfolio of four outlet malls located in Chongqing, Bishan, Hefei and Kunming.
• Furthermore, at current Sasseur REIT’s share price, it offers an attractive forward FY19 yield of 9.4%, which is among the highest in the S-REIT sector.

Where We Differ – Underappreciated Business Model

• Sasseur REIT’s share price is trading below its IPO price of S$0.80 which, in our view, is partially attributed to the lack of familiarity with its business model.
• Via the Entrusted Management Agreement (EMA) with its Sponsor, 70% of Sasseur REIT’s revenues are fixed, growing at 3% per annum and providing the REIT with downside protection. The remaining 30% of revenues are pegged to 4-5% of a property’s tenant sales, which provides leverage to the success of Sasseur REIT’s malls.
• Furthermore, we believe concerns over a depreciating RMB is overstated due to the rapidly growing tenant sales at its properties which grew by 29% y-o-y in 2018, beating its IPO and our DPU projections.

Upside From Acquisitions

• Sasseur REIT’s Sponsor has extended the right of first refusal (ROFR) over two properties and three pipeline properties which would triple Sasseur REIT’s gross floor area (GFA). A successful execution of an inorganic growth strategy may present upside risk to our earnings estimates.

Valuation

• After the better-than-expected 4Q18 results, we have raised our DCF based-Target Price to S$0.97 from S$0.91.

Key Risks to Our View

• The key risk to our view is slower-than-expected growth in tenant sales which would raise doubts on the sustainability of DPU despite the revenue guarantee provided by the Sponsor.

What's New - Strong Results to Convince Investors

FY2018 DPU exceeds expectations.

• Sasseur REIT ended the year on the high note with 4Q18 DPU of 1.999 Scts, translating into FY18 DPU (for 28 March to 31 December 2018) of 5.128 Scts.
• For FY18, Sasseur REIT’s DPU exceeded its IPO and our estimates by 13% and 11% respectively. The stronger-than-expected DPU performance is largely attributed to robust tenant sales.
• Furthermore, Sasseur REIT did not need to provide for statutory reserves (c.S$3m) owing to the strong profitability of the SPV holding the properties.

Tenant sales continuing the uptrend.

• Sasseur REIT’s 4Q18 outlet sales jumped 16% y-o-y to RMB1.3bn, translating into CY18 tenant sales of RMB4.3bn (+29% y-o-y) which exceeded our estimate of RMB4.1bn. Overall sales exceeded our estimates in all four outlets with stronger performances from the less mature malls.
• Chongqing Outlets reported a 5% y-o-y growth in 4Q18 tenants, with CY18 tenant sales up 12% y-o-y to RMB636m. This is strong result considering Chongqing Outlets is a mature mall having first opened in September 2018.
• Meanwhile, Hefei Outlets (which opened in May 2016) achieved a strong tenant sales growth of 43% y-o-y to RMB339m in 4Q18 (+58% y-o-y for CY18).
• Other newer malls in Kunming Outlets also showed strong results, with a 15% y-o-y increase in 4Q18 tenant sales to RMB223m, contributing to the 67% y-o-y rise for CY18. Finally, Bishan Outlets delivered a 16% y-o-y rise in 4Q18 tenant sales (+30% y-o-y for CY18).
• While y-o-y growth in tenant sales moderated in 4Q18 largely due to a high-base effect, we remain confident of Sasseur REIT continuing strong tenant sales into FY19, due to the inherent attractiveness of outlet malls and active management of the properties by Sasseur REIT. On that front, we have penciled in 3-35% growth in tenant sales across Sasseur REIT’s portfolio in FY19.

Large amount of leases due in FY19 a positive.

• In FY19, 74% of leases are expected to expire on a gross revenue basis. While this may be a concern for some investors, given the strong tenant sales performance across Sasseur REIT’s portfolio, we believe the ability to retain tenants is high. Moreover, with 78% of FY18 DPU supported by underlying income from the properties (stripping out the impact of the EMA), we believe the large number of leases due gives the Sponsor and the REIT the ability to restructure the leases to gain a greater share of tenant sales and reduce the shortfall provided by the Sponsor.
• Based on its IPO prospectus, Sasseur REIT guided that headline DPU will match the underlying DPU (stripping out the impact of the EMA).

Improved gearing levels.

• Gearing fell to 29.0% from 32.5% in the prior quarter, largely on the back of portfolio revaluation gains. We understand the 0.1-9.3% increase in property values was largely due to the impact of the higher income from the strong tenant sales. As a consequence of the higher property values, NAV per unit now stands at S$0.903, up 12.9% since its IPO. Meanwhile, average borrowing costs remained stable at 5.4% in 4Q18.
• Going forward, to mitigate the risk of higher interest rates, management is exploring opportunities to increase the proportion of fixed rate debt from 50% currently to 80%. Furthermore, Sasseur REIT does not face any no major refinancing requirement until 2021 when S$132m is due.

Raising FY19-20F DPU estimates.

• On the back of the stronger-than-expected tenant sales and the limited need to provide for statutory reserves, we raised our FY19-20F DPU by 6-7% which likewise translates into a higher DCF-based Target Price of S$0.97 from S$0.91.

Maintain BUY With Revised Target Price of S$0.97

• With 4Q18 results exceeding expectations and Sasseur REIT continuing to enjoy strong tenant sales, we believe investor concerns over Sasseur REIT’s ability to deliver on its robust IPO projections should be allayed and would convince more investors on the REIT's merits as an attractive investment opportunity.
• Thus, with 37% capital upside and 9.4% yield, we reiterate our BUY call with a higher Target Price of S$0.97.

Source: DBS Research - 20 Feb 2019