Sunway REIT has proposed to acquire 3 parcels of land of Sunway University Property for a total sum of RM550.0m. Upon completion in 1H19, it shall be leased to Sunway Education Group Sdn Bhd for 30 years. We are positive on the news as we opine that the acquisition price is fair and yield accretive. We maintain forecast pending completion of the acquisition. We maintain HOLD with unchanged TP of RM1.70 based on unchanged targeted yield of 5.9%.

NEWSBREAK

Sunway has proposed to dispose its Sunway University Property (733k sqft of land and 1.88m sqft GFA of buildings) to Sunway REIT for a consideration of RM550m. The disposal includes the South Building, North Building, New University Block, and Hostel and Sports Facilities but excludes the South Annex Building, Graduate Centre, East Building and International School. The disposal is expected to be completed by 1H19 pending relevant approvals.

HLIB’s VIEW

Positive on the acquisition. We are positive on the proposed acquisition as it is yield accretive, with our FY20-21 earnings increasing by 14% and 15% respectively. The property will be leased to Sunway Education Group Sdn Bhd for 30 years with an option to renew for a second term of 30 years and third term of 18 years and 4 months up to 31st March 2097. The buildings and land, will be leased at an agreed monthly rental of approximately RM1.50 per sq ft and RM0.50 per sq ft respectively, with step up rental reversions. This long lease term will provide Sunway REIT with stable and sustainable income stream hence further minimise the risk to Sunway REIT. Also, the acquisition represents an opportunity for Sunway REIT to further diversify its current property portfolio by acquiring properties in the new industry which may not be exposed with the same economic cycle. The acquisition price of RM550.0m is marginally above its net book value of RM486.0m. However this is deemed fair as it is at par with the market value based on valuations by the independent valuer.

Gearing. Sunway REIT intends to utilise debt facility of approximately RM550.0m from its existing credit lines and/or future financing facilities. As at 1QFY19, Sunway REIT’s gearing ratio stands at 38.6% and if it will be fully funded by debt, the gearing ratio is expected to increase to 42.8% (REITs has a gearing limit of 50%).

Forecast. We maintain our forecast pending completion of the acquisition.

Maintain HOLD, TP: RM1.70. We maintain our HOLD rating at TP RM1.70 based on targeted yield of 5.9% which is derived from 2 years historical average yield spread of Sunway REIT and 10-year MGS.

Source: Hong Leong Investment Bank Research - 26 Dec 2018