Investment Highlights

• We upgrade Sunway REIT (SREIT) to BUY from HOLD recommendation with a revised fair value of RM2.16 (from RM1.97) based on a lower target yield of 5.0%. We lower our target yield to 5.0% from 5.5% in view of the possibility that BNM may cut interest rates. We keep our FY20F–22F numbers unchanged at RM308.3mil, RM326.7mil and RM340.2mil respectively.

• During a recent meeting, management updated us on its latest development. Retail properties remain the key driver for SREIT in the short to medium term, especially Sunway Pyramid Mall which contributes 56% of total net property income (NPI). The company seeks to increase contribution from other segments and geographical locations to diversify its earnings base.

• Occupancy rates at Sunway Pyramid, Carnival and Putra Mall are strong at 98%, 97% and 90% 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 expansion of Sunway Carnival Mall, Seberang Jaya, Penang is progressing well and is scheduled to be completed by the end of 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 the 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 mid single-digit growth for FY20; hence we are keeping our FY19–21F numbers unchanged. We expect SREIT to register distributable incomes of RM303.8mil, RM326.7mil and RM340.2mil for FY20, FY21 and FY22 respectively.

• 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 & College campus will be financed via perpetual notes bearing an interest rate of 5.85% per annum.

• We like SREIT for its strong brand name and market position in the shopping complex segment which has posted an average occupancy rate of more than 90% over the past 3 years. We expect the outlook for retail properties, especially shopping malls, to remain stable in the short to medium term. In addition, shopping complexes are becoming one-stop centres for the Malaysian lifestyle, providing F&B and entertainment options. The stock currently offers a potential upside of more than 15%; hence we upgrade SREIT to BUY.

Source: AmInvest Research - 30 Oct 2019