News

• Sunway REIT proposed to acqui re a parcel of 3.3 acres (143,225 sq.ft.) of commercial leasehold land (Lot 5493) adjacent to Sunway Carnival Shopping Mall (SCM) located in Seberang Jaya, Penang from its sponsor Sunway Berhad, for RM17.20m, funded by existing debt facility.

• The land is to be used to develop extension of the new wing of SCM comprising a nine-storey retail space with 6 levels of parking above and one parking in the basement as well as a future commercial tower block.

• The completion of land acquisition is expected to be completed in 2H subject to approvals from SC on the waiver of non-permissible activities of property development and acquisition of a vacant land as per REIT guideline.

Comments

• We are neutral on the acquisition of land as the amount (RM17.2m, RM120 psf) involved is rather insigni ficant, as compared to SREIT’s total AUM of circa RM6.4bn.

• While the extension of SCM is not a surprise, undertaking the development of the extension is unexpected as REIT is not permissible to undertake property development and acquisition of a vacant land under existing SC guidelines.

• Therefore, the acquisition of land is conditioned upon SC approval. We believe the relaxation of rules would then be a game changer for the entire REIT industry should development activity is permissible.

• In the event of rejection by SC, the land development could still be undertaken by its sponsor, Sunway Berhad and to be injected into SREIT upon maturity.

• While we welcome the initiative to extend of SCM, we believe the capex involved would potentially hamper the company’s ability to maintain its payout ratio and DPU i f development is to be undertaken by SREIT, not to mention the inherit risk involved in development project.

• Gauging the potential financial impact, based on our assumptions laid out on page 2, the range of impact to our FY17 and FY18 forecasted DPU are circa 0.9%-2.1% and 1.6%-3.4%, respectively, while gearing could reach as high as 38.6%.

Risks

• Prolonged dampening of office market remains a drag.

• Intensifying competition for its assets and tenants.

Forecasts

• Unchanged pending further details on the development.

Rating

HOLD, TP: RM1.58

• Positives: Has the largest acquisition pipeline amongst MREITs; strong backing from Sponsor; well-diversified across various segments with low tenant concentration; and 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.

Valuation

• Maintain HOLD recommendation with unchanged TP of RM1.58 based on FY17 forecasted DPU.
• Targeted yield at 6.0% based on historical average yield spread of Sunway REIT and 10-year MGS.

Source: Hong Leong Investment Bank Research - 21 Jun 2016