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Broker's take: CGS-CIMB initiates coverage on Sasseur Reit with 'buy'

ANALYSTS at CGS-CIMB have initiated coverage on Sasseur Reit with a "buy" call and a target price of S$0.92 on the real estate investment trust's (Reit) exposure to China’s fast-growing retail outlet segment and a rental structure that the analysts say, provides downside protection while offering potential earnings upside.

At the mid-day break, Sasseur Reit units were at S$0.80, up two Singapore cents or 2.6 per cent.

CGS-CIMB said that the Reit has a first mover advantage in Tier-2 cities in China such as Chongqing, Bishan, Kunming and Hefei to capitalise on expanding private consumption appetite and rising number of middle-income households.

The analysts added that in their site visits, malls were stocked with a range of luxury brands to cater to changing consumer tastes of shoppers.

Sasseur Reit derives rental income from a lease arrangement called an entrusted management agreement. The arrangement has an entrusted manager to oversee the malls' day-to-day operations, marketing, tenant management and cash collection of the portfolio, which CGS-CIMB likens to a master lease structure.

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Rentals paid to the Reit are based on a mix of fixed rent and a variable component, of which the latter is tied to the underlying performance of tenant sales, which provides for stability with downside protection, the analysts said.

Moreover, Sasseur Reit has a gearing of 29 per cent, and based on CGS-CIMB FY2019-2020 estimates, has little refinancing needs and is able to engage in inorganic growth opportunities.

"Based on the 45 per cent aggregate leverage ceiling, we estimate Sasseur Reit has debt headroom of S$283 million to fund potential new acquisitions," the analysts said.

CGS-CIMB noted in its report that Sasseur Reit's sponsor Sasseur Group has expertise in the Chinese retail industry and has operated outlets for over a decade. Therefore, the Reit is positioned to benefit from Sasseur Group’s expertise in managing tenant mix and driving sales.

A slowdown in private consumption in China is a downside risk to the brokerage's call.

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