News

• Sunway REIT has entered into sale and purchase agreements for acquisition of Sunway Clio Property for a total purchase consideration of RM340m (subjected to valuation adjustment) from Sunway Berhad (BUY, TP: RM5.14)
• The property comprises a 19-storey, 401 rooms 4-star rated hotel (Sunway Clio Hotel), 88k sqft of 3 storey retail lots (Sunway Pyramid West) and a multi-storey car park.
• The proposed acquisition for the property is expected to be completed by 4Q17.

Comments

• We are positive on the news as the vendor will provide a guaranteed rental income of RM20.23m for a period of 4 years post acquisition which translates into net yield of c.5.95% vis-à-vis its current yield of c.5.3%. Sunway Clio Hotel is new (1.5 years) and need time to be mature. Moreover, any additional income on top of the guaranteed income will be retained by Sunway REIT further enhances the attractiveness of the acquisition.
• After the expiry of the guaranteed rental period, rental contribution from the property will based on the higher of minimum rent (c.RM8.23m) or variable rent (20% gross operating revenue + 70% net operating profit).
• In addition, the acquisition will provide long term income contribution as the hotel lease has 10 years tenure with renewal option for another 10 years. As a result, the WALE of Sunway REIT’s enlarged portfolio will increase to 2.3 years (from 2.02 years as at 31st March 2017).
• Going forward, we believe the performance from the hotel will improve as the hotel matures and benefits from operating synergies with Sunway REIT’s other properties located within Sunway City.
• The acquisition will be fully funded by existing debt facility and net gearing ratio will increase from 34.7% to 37.9%.
• Based on our estimates, the acquisition is expected to increase our FY18 EPU and DPU forecast by about 2%.

Risks

• Prolonged dampening of office market and consumer sentiments.

Forecasts

• Unchanged, pending completion of the deal.

Rating

HOLD ↔ , TP: RM1.70 ↔

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

Valuation

• Maintain HOLD recommendation with unchanged TP of RM1.70 based on FY18 forecasted DPU.
• 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 - 04 Aug 2017