Investment Highlights

• We maintain our HOLD recommendation on Sunway REIT (SREIT) with a higher fair value of RM1.75 from RM1.68 based on an FY20 target yield of 6% following earnings revision on FY20 earnings. We keep our FY19F numbers unchanged at RM281.3mil while raising FY20F–21F earnings forecasts by 3.5% and 4.2% to RM308.3mil and RM326.7mil respectively.

• Retail properties remain the key driver for SREIT, especially Sunway Pyramid Mall which contributes 56% of total net property income (NPI). The company plans to increase contribution from other segments and geographical locations to diversify its earnings base. The recent acquisition of education properties comprising land and buildings known as Sunway University in December 2018 will be completed by 1HCY2019, with the full-year contribution expected in FY20.

• Occupancy rates at Sunway Pyramid, Carnival and Putra Mall are strong at 99%, 98.2% and 91% respectively. Both Sunway Pyramid and Carnival have captive markets surrounded by mature townships, making them the leading malls in their locality, offering a wide array of retailers.

• The refurbishment of the grand ballroom and meeting rooms at Sunway Resort Hotel and Spa (SRHS) has been completed in 2QFY19. SRHS resumed business upon the completion of the refurbishment. Meanwhile, the recently acquired Sunway Clio Property has started contributing in 3QFY18 and shall see fullyear contribution in FY20.

• In Seberang Jaya, Penang, the expansion of Sunway Carnival Mall is scheduled to be completed by FY21. This expansion will see Sunway Carnival doubling its gross floor area to 1.45mil sq ft from the current 780,000 sq ft while net lettable area (NLA) will expand to 830,000 sq ft from around 500,000 sq ft. These will contribute an additional 5% to SREIT’s total revenue per year.

• Management has guided flattish growth for FY19, hence we are keeping our FY19 numbers unchanged. Nonetheless, we are revising our FY20F-21F earnings upwards by 3.5% and 4.2% to reflect the full-year contribution of the Sunway University land acquisition and completion of SRHS refurbishment.

• SREIT has been maintaining its gearing level at around 33%– 37% for the past 3 years while interest coverage is manageable at above 5x. The acquisition of Sunway University land and buildings at RM550mil and expansion of Sunway Carnival, which costs about RM500mil over the next 3-4 years will see its net gearing rise to about 45%, nearing the regulatory threshold of 50%. SREIT is planning to refinance part of its debt via the issuance of a RM3bil 7-year commercial paper programme. Details of the deal will be announced on a later date.

Source: AmInvest Research - 18 Mar 2019