• Revenue came in slightly below our, exacerbated by the depreciation of the RMB against SGD.
• Portfolio occupancy crept up 80bps from 97.6% to 98.3%. However, higher operating costs depressed NPI margins.
• The proposed acquisition of Domen Metro Mall will lift underlying DPU by 12.1%.
• Maintain ACCUMULATE with unchanged TP of S$0.94.

The Positive

+ 15.3% ROI on AEI at Xiaolan Metro Mall. One of the AEI at Xiaolan was opportunistic embarked on after a restaurant tenant gave up half the space (2,500 sqm, 3.2% of mall NLA) of a lease with a 2026 expiry in 1Q19. This AEI costs S$0.8mn is expected to be completed by end-2019. The surrendered space will be carved up into eight smaller units for new F&B tenants. Six of the leases have since commenced in Aug 2019. Dasin is expecting to receive a 35% increase in rental post-AEI, translating to a c.15.3% ROI on the AEI.

The Negative

– Falling property valuation and NPI margins. Valuations fell by 1.1% to 3.3% across all four malls resulting in a S$21mn revaluation loss. This was due to lower rental growth rate assumptions used by the valuer. NPI margins were 75.4% for 2Q19 (2Q18 87.5%), 5ppts lower than DRT’s targeted annualised NPI margin of 80% due to higher operating expenses (+S$0.5mn) and higher stamp duty on leases (+S$0.3mn). As two of the malls (Ocean Metro and Dasin E-Colour) are relatively younger malls, we can expect rental growth from the refinement of the tenant mix, as well as selective AEIs, which will help to increase valuations in the mid-term.

What else is new?

Proposed acquisition of Doumen Metro Mall

Dasin announced the proposed acquisition of Doumen Metro Mall from the Sponsor on 30 June 2019. The agreed property value of RMB1,585mn (S$317.1mn) is a 23% discount to valuation and will increase the AUM by 21.8%, contributing 21.4% of revenue to the enlarged portfolio. The proposed acquisition is will likely be c.75% debt funded and will increase DRT’s gearing from 32.3% to 35.2%. As this is an interested-party transaction, the acquisition will be subjected to a shareholder vote at the EGM on 16 Aug 2019. If approved the transaction is expected completed by end-2019.

Key benefits of the acquisition are:

1. DPU accretive (+12%), increasing DPU without waiver from 3.81 to 4.27 cents (Figure 1)
2. Better income diversification among the portfolio assets (Figure 2)
3. NAV per unit increases by 3.6% from S$1.39 to S$1.44

Recall that Dasin has a distribution waiver where two of Dasin’s largest shareholders elect to waive their rights to distributions (DPU) until FY22. The distribution waiver is meant to provide short-term DPU support to smoothen out the gestation period of the two younger malls in the portfolio, Dasin E-Colour and Ocean Metro Mall. The number of units that will not be entitled to distributions will decline over the years such that the “DPU support” will fall off gradually. With c.2.3 years until the end of the distribution waiver, the current gap between the DPU with and without the distribution waiver measures at 3.41 cents, almost double the current DPU without distribution waiver (3.81 cents).

The management has two ways to bridge the DPU gap – operationally driven organic growth or growing revenues inorganically through acquisitions. We will see more meaningful growth in revenues via acquisitions, as evident by the 12.1% accretion of real underlying DPU in the absence of the waiver. While current shareholders will be unaffected by the accretion and still receive the same dollar amount of DPU(Figure 1), the growth in earnings and underlying DPU will help to close the DPU gap and mitigates the possibility of a DPU cliff in FY22.  

Outlook

We remain positive on the inorganic growth prospects for Dasin. There remains a ROFR pipeline of 20 properties spanning four cities – six of which are still under construction. Shunde Metro Mall, will be next likely acquisitions for Dasin.

Maintain ACCUMULATE with an unchanged target price of S$0.94.

Our target price of S$0.94 translates to a FY19e yield of 8.0% and a P/NAV of 0.65x. Key risks to our valuation remain the FX volatility and the depreciation of the RMB.