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Broker's take: DBS initiates coverage on Sasseur Reit with 'buy'

DBS Group Research has initiated coverage on Sasseur Real Estate Investment Trust (Reit) with a "buy" rating and a S$0.91 target price.

Sasseur Reit, a China mall outlet operator, listed on the Singapore Exchange's mainboard on March 28. It currently has four malls in Chongqing, Bishan, Hefei and Kunming.

In their report on Tuesday, DBS analysts Derek Tan and Mervin Song noted that Sasseur Reit is the first Singapore Reit with exposure to the fast-growing Chinese outlet mall industry, which is projected to grow at a compound annual growth rate of 24 per cent between 2016 and 2021.

The DBS analysts project Sasseur Reit's overall portfolio tenant sales to increase by 16 to 24 per cent per annum over the next two years, noting that tenant sales have exceeded initial public offering (IPO) forecasts so far, growing at 13 to 136 per cent year-on-year in Chinese yuan terms.

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Sasseur's unique model, in which it has an Entrusted Management Agreement (EMA) with its sponsor, provides upside as well as downside protection, said the analysts.

Under the EMA, 70 per cent of the group's revenues are fixed and growing at 3 per cent per annum, providing the Reit with downside protectio. The remaining 30 per cent is pegged to 4 to 5 per cent of a property's tenant sales, providing leverage to the mall's success, said the analysts. The sponsor also bears all operating costs for the malls and guarantees a minimum revenue for at least two years if the Reit does not hit its IPO forecasts.

"The key risk to our view is slower than expected growth in tenant sales which would raise questions about sustainability of distributions per unit despite the revenue guarantee provided by the sponsor," the analysts said.

Sasseur Reit's sponsor has extended the right of first refusal over two properties and three pipeline properties, which will triple the Reit's gross floor area.

DBS said: "With gearing at 33 to 34 per cent, Sasseur Reit is well positioned to execute its inorganic strategy, providing upside risk to our estimates."

Units of Sasseur Reit are trading below their IPO price of S$0.805. As at 10.20am, they were down one Singapore cent or 1.4 per cent to S$0.71.