Highlights

• Actively looking for assets. Growing inorganically is the focus for SREIT as they continue to search for yield accretive assets from sponsors & third party to further diversify and grow their portfolio as rental reversion has slowed since last year. Potential injections from sponsors include Pyramid Phase 3 (including Cleo Hotel) and the Pinnacle where SREIT has the ROFR, which is more straight forward compared to the first right to match for Sunway Giza and Sunway Velocity, which are owned by JV vehicle.
• Still banking on its flagship mall. Sunway Pyramid Mall (SPM) remains the main income contributor which makes up circa 60% of total income. Despite the softer rental reversion trend at mid-single digit; potential positive surprise could emanate from upside in variable rent due to improved sentiment and historical performance.
• Sunway Putra Mall (PM) remains challenging with rebates given out to some struggling tenants for the renewals as the tenants’ sales were not commensurate with the healthy footfall. However, we still expect a yoy growth for PM due to low base from the free-rent period back in 1QFY16. We understand that Parkson will be coming in to be the crowd puller anchor tenant and expect PM to fare better only in CY18 which is usually the case post first cycle of lease term.
• Update on Sunway Pyramid Hotel (SPH). SPH hotel refurbishment (formerly known as Hotel Pyramid East) is still ongoing and is expected to complete by 1HCY18 instead of 1QCY18 guided previously. So far, 300+ out of 564 rooms have been reopened.
• Improved occupancy for offices. Improvement in office occupancy for Sunway Putra Tower from 26.7% to 42% in 3QFY17 is encouraging whereas the search for tenants for Sunway Tower still ongoing.
• The acquisition of industrial asset in Bandar Shah Alam announced back in January is expected to contribute positively in 4QFY17 once the deal is completed. Other than industrial asset, SREIT is also keen on other type of assets such as data centre, logistic warehousing as long as they are yield accretive and in the form of triple net lease.
• Dip in FY17 DUP. Management is still guiding a dip in DPU for FY17 due to the cessation of management fees payable in unit and loss of income from SPH.

Risks

• Prolonged office market and consumer’s dampened sentiment.

Forecasts

• Unchanged.

Rating

HOLD ↔, TP: RM1.70 ↔

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

Valuation

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

Source: Hong Leong Investment Bank Research - 27 Mar 2017