Investment Highlights

• We resume our coverage on Sunway REIT (SREIT) with a BUY recommendation, valuing the company at RM1.94 based on a target yield of 5.5% over FY22F distributable income (following the dilution of DPU by 10% from the recent placement exercise).
• We are now projecting SREIT to record a distributable income of RM437.0mil (18 months), RM365.9mil and RM399.0mil in FY21F–FY23F respectively on the back of a gradual recovery in its retail and hotel segments as the Covid-19 pandemic subsides, further enhanced by the additional revenue contribution from the recently acquired/upgraded assets such as The Sunway Pinnacle (office), Sunway Carnival Mall (retail mall), Sunway Resort Hotel & Spa, etc.
• For the retail segment, we are projecting the retail average rental rates to recover slightly by 2.5% in FY21F (18 months), followed by a higher 7% for FY22F from a low base, underpinned by the recovery of local footfall (from adjacent residential, offices, and university traffic), as well as the retail spending. The additional earnings contribution from Sunway Carnival Mall is also expected to boost the retail segment’s revenue, upon its completion of its phase 1 expansion (slated to be completed by CY21).
• Meanwhile, we are forecasting the hotel segment average occupancy rate to be at around 33% in FY21F, and will rebound to above 60% in FY22F, on the back of the easing movement restrictions (for domestic and partial international travel). Also, the reopening of Sunway Resort Hotel, which has been closed for refurbishment since July 2020 (expected to last for 12– 24 months, and is scheduled to reopen progressively from 3QFY21) will help boost the segment.
• Other segments such as the office segment, services segment as well as industrial segment will continue to grow steadily moving forward. On top of that, The Pinnacle Sunway (the acquisition was just completed in 2QFY21) is also expected to contribute positively to the office segment.
• We believe the key risks to our assumptions include: (1) slower-than-expected movement restrictions relaxation, thus affecting the footfall at the retail shopping malls, as well as occupancy rates at the hotels; and (2) weaker-than-expected recovery in consumer spending
• SREIT’s debt-to-asset ratio increased slightly to 41% (from 37% previously), but remain well below the regulatory threshold of 60% (temporary increased limit from 50% up to 31 December 2022 as part of the relief measure implemented by the Securities Commission in light of Covid-19). At the current level, we believe SREIT still has some headroom to gear up for future acquisitions.
• At our valuation of RM1.94 (based on FY22F forward target yield of 5.5%), SREIT offers a potential upside of 24%. We continue like SREIT as we believe its long-term outlook remains positive given its diversified strategic asset portfolio, backed by defensive tenants, and is poised to benefit from the growth in Malaysia’s economy post-pandemic. We also like SREIT as a recovery play stock with reasonable returns, dividend yields of 8.1% for FY21F (18 months), and more than 6% for FY22F and beyond, as compared to the current low interest rate environment.