Sunway REIT (SREIT) has proposed to acquire from Sunway Berhad RM550m worth of lands and academic buildings. The assets are leased to Sunway Educational Group for an initial lease term of 30 years (with options to renew up to 2097). We are mildly positive on the proposed acquisition – the initial gross yield of 6.95% looks fair and the deal is expected to be earnings accretive (assume fully debtfunded). That said, we expect SREIT’s gearing to hit a high of 42.8% post-acquisition and its future earnings will be more vulnerable to any interest rate hike. No change to our earnings forecasts. Maintain BUY.

Acquiring RM550m Worth of Lands and Academic Buildings

SREIT had on 24th December 2018 entered into a conditional sale and purchase agreement with Sunway Destiny Sdn. Bhd., an indirect whollyowned subsidiary of Sunway Berhad, for the acquisitions of 3 parcels of lands and several academic buildings (“assets”). The details are as followed:

(i) The assets include 3 parcels of leasehold land in Bandar Sunway measuring 733,237 sf and several buildings (3 blocks of academic buildings, 4 blocks of walk-up hostel apartments and sport facilities) with 1,880,338 sf of gross floor area. We believe the assets currently houses the Sunway University Campus;

(ii) The purchase consideration is RM550m, to be satisfied in cash;

(iii) The assets are leased to Sunway Education Group Sdn. Bhd. with an initial lease term of 30 years, with an option to renew for a second term of 30 years and a third term of 18 years up to 31st March 2097;

(iv) Rental for the buildings are approximately RM1.50 psf per month over the gross floor area while rental for the leased lands are approximately RM0.50 psf per month, both with step-up rental reversion; and

(v) The proposed acquisition is a related party transaction.

Mildly Positive on the Acquisition

We are mildly positive on the proposed acquisition: (i) the price tag translates to an initial gross yield of 6.95% per annum, looks fair; (ii) assuming the acquisition is to be funded fully by debt, the acquisition should be earnings accretive; (iii) the long lease tenures (30+30+14 years) with Sunway Education Group provides good earnings visibility; and (iv) the acquisition will further diversify SREIT’s asset mix. On the flip side, the acquisition should increase SREIT’s gross gearing ratio to a high of 42.8% (from 38.6%) and its earnings will be more vulnerable to any hikes in interest rate. Overall, we estimate the acquisition to enhance SREIT’s FY20-21E EPU by 2%.

Maintain BUY with an unchanged TP of RM1.95

We maintain our earnings forecasts, BUY rating and DDM-derived 12-month target price for RM1.95 for now, pending completion of the proposed acquisition (management expects the deal to be completed in 1H CY2019). We continue to like SREIT for its diversified asset base and resilient earnings stream. Key risks to our BUY rating are (i) weaker-than-expected earnings from retail and hotel segments; and (ii) successive interest rate hikes.

Source: Affin Hwang Research - 26 Dec 2018