Highlights

We attended a briefing by SREIT where it shared details on its refurbishment plans for Sunway Putra Place (SPP).

Accelerated scheme. Previously, SREIT intended to carry out the refurbishment of the mall, hotel and office in stages, but will now refurbish all three concurrently. This will allow SPP to be marketed to tenants as a holistic and rebranded package deal. The mall is targeted to open in early CY15.

Positioning remains intact. We also learnt there will be no changes to its positioning as a mid-upper end lifestyle mall. Due to its integrated nature, SPP is envisioned to capture family, office and tourist markets in a synergistic fashion.

Details on tenant mix. SREIT is guiding for fashion outlets to account for 40% of tenants, while F&B will be 20%. The balance 40% will be spread across various trades such as IT, fitness and entertainment outlets.

Hotel refurbishment plans. SPP hotel will be tweaked to become more of a conference oriented hotel, given its proximity the UMNO headquarters. To this end, the existing Chinese restaurant will be converted to breakout meeting rooms.

Indicative return figures. Refurbishment costs are expected to amount to RM459m and expected to yield stabilised ROI of 7.5-8.5%. SREIT is guiding for post refurbishment NPI of RM70-80m, inline with our RM72m estimate. Average rental for the mall is expected to increase from RM4-4.50psf to RM6-7psf, the office rental from RM2.40psf to RM3psf, and hotel room rates rising from RM190/day to RM350-370/day.

Risks

Highly reliant on Sunway Pyramid; intensifying competition for assets and tenants.

Forecasts

We had previously imputed full FY15 earnings contribution from SPP Mall, but given its delays due the hotel, SREIT now guides for it to be ready in mid FY15. We now impute 6 months’ earnings contribution and reduce our FY15 net profit forecast by 5.1%.

Rating

HOLD

Positives: Has the largest acquisition pipeline amongst M-REITs; strong backing from Sponsor; welldiversified across various segments with low tenant concentration; synergy with Sponsor’s townships.

Negatives: Still heavily reliant on Bandar Sunway, which will take time to change; persistent weakness in the office segment due to oversupply of new office space; choppy performance in the hotel segment.

Valuation

Our target DY is maintained at 6.5%, due to the performance drag from its hotel assets, while our TP remains unchanged at RM1.26. HOLD

Source:Hong Leong Investment Bank Research - 25 Nov 2013