• Sasseur REIT's 2Q/1H20 DPU of 1.51/2.85 Scts are in line with expectations, at 25.4%/ 47.8% of our FY20F forecast.
• Sasseur REIT saw improving tenant sales in 2Q, plans to create value through AEIs.
• Reiterate ADD with a higher DDM-based Target Price of S$0.84.

Sasseur REIT's 2Q20 Results Highlights

• Sasseur REIT (SGX:CRPU) reported a 2Q20 entrusted manager agreement (EMA) rental income of S$28m, - 4% y-o-y, while distributable income came in at S$18.2m (-5.2% y-o-y), translating to DPU of 1.512Scts (-6% y-o-y). However, on a q-o-q basis, it recorded across-the-board improvements of 10.7% and 13.3% in EMA rental income and DPU, respectively, thanks to a q-o-q recovery in sales, as its outlet malls reopened.
• Sasseur REIT’s aggregate leverage stood at 28.1% at end- 2Q20, with a healthy interest coverage ratio of 5x.

Strong Q-o-q Recovery in Tenant Sales in 2Q20

• Although total outlet mall sales fell 18.6% y-o-y to Rmb835.7m in 2Q20, it was a commendable 56.3% recovery from 1Q20. The largest q-o-q pick-up in sales came from the Chongqing (+70.3% q-o-q) and Hefei (+69.6% q-o-q) outlet malls, while the Bishan and Kunming outlet malls delivered a 51.5% and 17.7% q-o-q sales growth respectively.
• Portfolio occupancy dipped slightly to 93.6% at end-2Q, with 1,153 tenants, even while VIP membership increased 9% q-o-q. Against this backdrop, EMA rental income grew 10.7% q-o-q, with the variable component making up 27% of the topline.
• Sasseur REIT has a remaining 44.9% of net lettable area to be renewed in 2H20F. With major sales events planned for its anniversary sales, held annually in Sep, management expects robust leasing take-up for its upcoming renewals.

Value Creation Through AEIs

• Sasseur REIT’s asset enhancement initiatives (AEIs) continue to progress well. These include repositioning the Chongqing outlet mall as a lifestyle and shopping destination with a specific theme intended to enlarge the shopper base from Chongqing and other parts of China. It will reconfigure retail units and floor plates to achieve higher efficiency as well as retrofit and refurbish the interior of the mall. The AEI is expected to complete by 2Q21F.
• Expected to complete in 1Q21F, the Hefei outlet mall AEI will involve space maximisation and conversion of a traffic driveway to pedestrian walkway between blocks A and B to create a seamless flow of shoppers between blocks A and B. Major retro-fitting and refurbishment work to block B is planned to convert the interior to cater for international sports brands. In addition, with a low gearing of 28.1%, Sasseur REIT can continue to explore yield-accretive inorganic growth opportunities, in our view.

Reiterate ADD Rating

• We raise our Sasseur REIT's FY20-22F DPU forecasts by 0.6% to reflect a better than expected recovery in tenant sales at its outlet malls. Accordingly, our DDM-based Target Price is raised to S$0.84.
• We reiterate our ADD rating as we believe the long-term uptrend for outlet malls is still intact in China.
• Downside risks: slowdown discretionary consumption due to weaker economic outlook.

Source: CGS-CIMB Research - 14 Aug 2020