• Sunway REIT (SREIT) has entered into a conditional sale and purchase agreement to acquire Kluang Mall in Johor for RM158mil cash from Tenaga Nusantara, with completion expected by 4Q2024.

• This is a 4-storey shopping complex with a net lettable area of 360k sq ft and 920 car park bays which caters to a population of 320k residents in Kluang town with a potential 1mil resident catchment from Batu Pahat, Ayer Hitam, Kulai and Mersing in central Johor.

• The asset is 99% occupied with over 130 tenants, anchored by Pacific Hypermarket & Department Store. This will be slightly earnings accretive as the asset is expected to generate an indicative net property income yield of 6.8% based on the purchase price vs. the REIT portfolio’s 5.7% in FY23. However, given that the asset size will only add a slight 1.6% of to the REIT’s existing asset portfolio, we do not expect a significant accretion to distribution yields.

• The purchase is expected slightly increase the REIT’s FY24F debt-to-asset ratio to 40% from 38.1%, which remains comfortable compared to the SC’s ceiling of 50%.

• We maintain BUY on SREIT with an unchanged fair value (FV) of RM1.87/unit based on our dividend discount model, which incorporates a 4-star ESG rating . The FV implies a FY25F distribution yield of 6%, at parity to its 5-year median.

• SREIT currently trades at a compelling FY25F PE of 15x vs. its 4-year average PE of 20x. Meanwhile, FY25F distribution yield of 6.6% is attractive vs. current 10-year MGS yield of 3.8%. SREIT’s distribution yield spread of 2.8% against 10-year MGS vs. a pre- pandemic (2017-2019) median of 1% should appeal to yield-seeking investors.

Source: AmInvest Research - 9 Aug 2024