Sunway announced the acquisition of 3 freehold purpose-built student accommodations in the UK for a total purchase consideration of c.RM202.8m. We remain positive on the news as we gather that the net property yield is close to 7%, providing Sunway with a new source of recurring income. The student accommodations are located in prime locations garnering a 100% occupancy in both bed spaces and commercial units, with the exception of Redvers House. We tweak our FY20/21 earnings upwards by 1.5%/1.4%, respectively as we impute the earnings contributions from the acquisition. Maintain BUY rating with an unchanged TP of RM2.17 based on a 10% holding discount from SOP derived valuation of RM2.41.

NEWSBREAK

Recall that on 16 Oct 2019, Sunway announced the establishment of a private trust in Singapore to acquire purpose-built student accommodations in the UK with a capital of c.GBP38m or RM202m to be injected by the end of the year.

Subsequently, Sunway has just announced that it has entered into agreements to acquire 3 freehold purpose-built student accommodations via its SPV owned by the trust. The properties are as follows: i) The Colston, Colston Avenue, Bristol; ii) Centregate, Colston Avenue, Bristol; and iii) Redvers House, Union Street, Sheffield. The total purchase consideration is approximately RM202.8m i.e. the amount injected into the private trust.

HLIB’s VIEW

Positive on the news. We remain positive on the news as we gather that the net property yield is close to 7%, providing Sunway with a new source of recurring income. The student accommodations are located in prime locations garnering a 100% occupancy in both bed spaces and commercial units, with the exception of Redvers House. Our pro-forma calculation implies that net gearing would increase to 0.38x from 0.36x (as at 2Q19) post injection.

The accommodations. Both The Colston and Centregate are located in Bristol, catering to the students from the University of Bristol with proximity of c.0.8km. The Colston is a 5-storey building providing 77 bed spaces and a NLA of 4k sqft while Centregate is a 7-storey building providing 85 bed spaces and a NLA of 708 sqft; both the accommodations generate annual rental incomes of over GBP700k each. Redvers House, located in Sheffield, caters to students from the University of Sheffield and Sheffield Hallam University with a proximity of c.1.6km and 0.3km, respectively. Redvers House is a 14-storey building providing 227 bed spaces and a NLA of 110k sqft, generating annual rental income of almost GBP2m.

Forecast. We tweak our FY20/21 earnings upwards by 1.5%/1.4%, respectively as we impute the earnings contributions from the acquisition.

Maintain BUY with an unchanged TP of RM2.17 based on a 10% holding discount from SOP-derived valuation of RM2.41. Sunway remains our top pick given its well integrated property and construction development. Its hidden gem, the healthcare business (with 4 new hospitals coming on stream over the next three years) has yet to be appreciated as it is embedded within the parent-co. These coupled with the resilient earnings from mature investment properties alongside its growing building materials business and quarry operations justifies for the re-rating of the stock.

Source: Hong Leong Investment Bank Research - 1 Nov 2019