SunREIT has proposed to undertake a placement of up to 452.2m new units, representing c.15.4% of its existing share base. The placement will be utilised for acquisition of The Pinnacle Sunway (RM405m) from Sunway Berhad, capital expenditure for expansion of Sunway Carnival Mall (RM295.3m) and defray estimated expenses for the proposals (RM9.7m). We are positive on the acquisition of TPS as it is yield accretive while expansion of SCM plan will contribute positively at later years. We estimate that the placement exercise would dilute DPU for unitholders in the near term. However over the longer time horizon, these new contributions will increase the earnings and eventually offset the dilution. We maintain our forecast pending more detail from management. Maintain BUY with unchanged TP of RM1.74.

NEWSBREAK

SunREIT announced that it will be undertaking: 1. Acquisition of The Pinnacle Sunway (TPS), land and building comprising a 24- storey office building with three-storey mezzanine floors and six levels of basement car park, of approximately 577k sqft net lettable area from Sunway Bhd. The building is located next to Menara Sunway and Sunway Resort Hotel & Spa. The proposed acquisition will cost RM450m, to be funded by placement exercise. The property has a 100% occupancy rate and is expected to be completed by 4QFY20. 2. Placement of up to 452.2m new units, representing c.15.4% of its existing share base. Based on its assumed indicative issue price of RM1.57 (5% discount to the 5-day weighted average market price up to and including 16 June 2020 closing price of RM1.65), the placement will raise RM710m. This will be utilised for settlement of balance purchase of TPS (RM405m), capital expenditure for expansion of Sunway Carnival Mall (SCM) (RM295.3m) and defray estimated expenses for the proposals (RM9.7m). 3. Proposal of dividend reinvestment scheme (DRS) to provide unitholders with an option to elect to reinvest their cash income distribution in new units of the REIT.

HLIB’s VIEW

Yield accretive acquisition. We are positive on the acquisition as it is yield accretive, based on a NPI yield of 6.2% (from 2019 NPI). TPS has a 100% occupancy rate and historically has achieved an average occupancy rate of over 98% over the past 3 years. The building has a gross rental income of RM36.4m as of FYE 31 Dec 2019 and on the bottom-line level, we estimated that the properties will contribute c.RM16m annually to SunREIT’s earnings. This acquisition will provide SunREIT with stable and sustainable income stream. Acquisition price of RM450m is marginally above its net book value of RM410m. However, this is deemed fair as it is at par with the market value based on valuations by the independent valuer.

Expansion of SCM plan will contribute positively at later years. The expansion is expected to enhance tenancy mix of international and regional retailers and will increase the NLA of the mall by approximately 350k sq ft. Phase 1 of the expansion work commenced in 2018 and is expected to be completed in 2021. We estimated that the annual incremental from this expansion will contribute c.RM18m to SunREIT earnings once completed.

DPU dilution due to placement exercise. Full year impact to FY21-22 EPU and DPU would be about c.13% net dilution before acquisition income. However, after incorporating income from TPS, net dilution would be lower about c.8%. Over the longer time horizon, we believe the incremental income from SCM should offset the net dilution.

Forecast. We leave our forecast unchanged for now pending more details from management.

Maintain BUY with an unchanged TP: RM1.74. Notably, our valuation is based on FY21 DPU on targeted yield of 5.4% which is derived from 2-years historical average yield spread of SunREIT and MAGY10YR. We continue to like SunREIT for its well diversified portfolio in which the prominent assets are located at its unique township planning and strong backing from its sponsor.

Source: Hong Leong Investment Bank Research - 30 Jun 2020