News

• Sunway REIT (SunREIT) has proposed to acquire an industrial property that is held under leasehold title (expiring in 2098). The 62,587.34 sqm (673,685 sqft) property includes the land, a two-storey office with an annexed one- storey factory with mezzanine floor, a three-storey office together with an annexed one-storey warehouse and an integral two-storey office together with a two-storey factory cum warehouse with an adjoining M&E building at Bandar Shah Alam, Selangor for RM91.5m.
• The property is tenanted by IDS Manufacturing Sdn. Bhd, who is a contractor in the manufacturing of pharmaceutical products, food and toiletries and warehousing operations. The current annual rental is RM5.6m (step up rate at 10%- capped every 3 year based on prevailing market price) on a triple net lease basis. The existing long lease term will only expire on 31 December 2034 and will automatically be extended for another term of 5 years.

Comments

• We are positive on this yield-accretive acquisition with a net yield of 6.12% vis-à-vis its current yield of circa 5.3%. Acquisition price worked out to be around RM136 psf, which is fair for leasehold industrial space at Bandar Shah Alam and is within the RM92m value appraised.
• The acquisition will be fully funded by existing debt facility, which will mildly increase its gearing to c.36% from 35% post-acquisition, below the prescribe limit of 50%.
• Although the asset value is only 1.4% of its portfolio, a stable income stream from this property would help to diversify its asset classes and increase income stability, while achieving scale. Post-acquisition, it will have 15 assets with portfolio value of c. RM6.5bn.
• The property is of good quality given its strategic location and is fully tenanted by a reputable MNC, which is ultimately owned by Hong-Kong-based conglomerate Dah Chong Hong Holdings Ltd under a long triple net lease term (works into favour of SunREIT which has relatively less experience in industrial space).

Risks

• Prolonged dampening of office market and consumer sentiments.

Forecasts

• Unchanged at current juncture given its minimal impact while pending for imminent release of 2Q17 results.

Rating

HOLD ↔, TP: RM1.70 ↔

• We like SREIT for its well-diversified portfolio in which the prominent assets are located at its unique township planning with large acquisition pipeline and strong backing from sponsor. However, FY17 will experience a dip/flat DPU following loss of income from SPH, slow growth in Sunway Putra and persistent weakness in office segment.

Valuation

• Maintain HOLD recommendation with unchanged TP of RM1.70 based on FY18 forecasted DPU of 9.8 sen.
• Targeted yield at 5.8% based on historical average yield spread of Sunway REIT relative to 10-year MGS.

Source: Hong Leong Investment Bank Research - 12 Jan 2017