Brokers' take: KGI downgrades Sasseur Reit to 'neutral' on slower H2 growth outlook

KGI Securities has downgraded Sasseur Real Estate Investment Trust (Sasseur Reit) to "neutral" amid expectations of slower growth in the second half.

The research house had in June last year initiated coverage on Sasseur Reit, which owns outlet malls in China, with an "outperform" recommendation and a target price of S$0.89.

While raising its target price to S$0.97, its analysts believe Sasseur Reit's risk-reward profile has become "less attractive".

"We believe Sasseur's 14 per cent year-to-date unit price appreciation has largely priced in the recovery from the Covid-19 lows," said analysts Joel Ng and Megan Choo in a report on Thursday.

"We expect spending sentiments to take a hit in the second half of this year due to the Delta variant and the regulatory clampdown that the government is currently embarking on," they added.

While retail sales grew 8.5 per cent year-on-year in July, the analysts noted that this was the lowest increase since December 2020, and missed expectations of an 11.5 per cent expansion.

"Although structured as a Reit, Sasseur generates its rent revenue mainly through a sales-based system whereby tenants pay an agreed percentage of their sales revenue to the sponsor. Therefore, Sasseur allows investors a proxy to China's outlet retail spending, the country's fastest growing retail segment," Mr Ng and Ms Choo said.

For the three months ended June 30, rental income under its entrusted management agreements (EMAs) was 5.6 per cent higher at S$32.0 million, from S$30.3 million in the year-ago period.

The Reit posted a distribution per unit (DPU) of 1.614 Singapore cents for Q2, up 6.7 per cent from 1.512 cents in the year-ago period.

Distributable income rose 19.7 per cent to S$21.7 million in the second quarter, from S$18.2 million a year ago.

"With likely increase in rental income in the second-half coupled with prudent financing, we expect a slight DPU upside in H2 2021 and subsequently higher overall DPU in FY2021," the analysts said.

Units of Sasseur Reit are trading 0.5 per cent or half a Singapore cent higher at S$0.94 as at 4pm on Thursday.