• Sasseur REIT's 1Q20 DPU of 1.334 Scts was below our estimate, at 21% of our FY20F forecast.
• Dragged down by loss of tenant sales from mall closures, we believe sales are still stabilising post reopening.
• Reiterate ADD with a lower DDM-based Target Price of S$0.80.

1Q20 Results Highlights

• Sasseur REIT (SGX:CRPU) reported a 1Q20 entrusted manager agreement (EMA) rental income of S$25.3m, -18.2% y-o-y, while distributable income and DPU came in at S$16m (-18.7% y-o-y) and 1.334 Scts (-19.4% y-o-y), respectively, due to lower total outlet sales following the temporary closure of all four outlet malls for 44 to 49 days from end-Jan to mid-Mar as a precautionary measure to prevent the spread of Covid-19.

Dragged by Loss of Tenant Sales From Temporary Mall Closures

• Total outlet mall sales fell 55.7% y-o-y to Rmb534.5m in 1Q20; however, EMA rental income dipped by a smaller 18.2% y-o-y thanks to the EMA fixed component which grew 3.9% y-o-y. The variable component declined 54.8% y-o-y and made up a smaller 19.5% of topline.
• Portfolio occupancy was slightly lower q-o-q at 94.8%, dragged by a 6% pts drop in occupancy at Bishan Outlet Mall to 86.5% as management indicated that some of its lease expiries occurred during the mall closure period. That said, management said a significant proportion of leases expiring in FY20F have since been re-contracted.
• Meanwhile, VIP membership further increased by 4.8% q-o-q to 1.661m at end-1Q20.

Planning AEIs at Chongqing and Hefei Outlet Malls

• Sasseur REIT is planning some asset enhancement initiatives (AEIs) to continue to bolster sales going forward. It intends to reposition Chongqing Outlet mall as a lifestyle and shopping destination for both locals and tourists. It expects the AEIs to begin in May 2020F and be completed by 1Q21F.
• It also intends to create synergy between the two buildings at Hefei Outlet Mall by repositioning Block B into a sports themed complex as well as maximising space by converting the pedestrian walkway to enhance shoppers’ flow between Block A & B. The works are likely to start in June 2020F and be completed by end-4Q20F.

Balance Sheet Remains Robust

• Sasseur REIT’s aggregate leverage stood at 28.5% at end-1Q20 with a healthy interest coverage ratio of 4.7x. There is no significant debt maturing in FY20F and management is already in discussions to refinance S$133m of debt due in FY21F.
• With a potential debt headroom of S$305m-379m, based on a gearing ceiling of 45-50%, Sasseur REIT can continue to explore yield-accretive inorganic growth opportunities, in our view.

Reiterate ADD Rating

• We lower our FY20-22F DPU forecasts by 6.1-6.7% to reflect lower tenant sales at its outlet malls. Accordingly, our DDM-based Target Price is lowered to S$0.80. We reiterate our ADD rating as we believe the long-term uptrend for outlet malls is still intact in China.
• Downside risks: slowdown in discretionary consumption due to weaker economic outlook.

Source: CGS-CIMB Research - 14 May 2020