We reiterate our BUY rating on Sunway REIT (SREIT) with a lower DDM-derived price target of RM2.00, following 2-5% cuts in the 2020- 22E EPU in view of the weak hotel market outlook. Nonetheless, we still expect SREIT to see a higher FY20E EPU (+3.4% yoy), driven by higher contribution from Sunway Pyramid, Sunway Resort Hotel, and its medical and education segments. We like SREIT’s long-term strategy (to expand its asset portfolio by up to 88% by 2025); further expansion in the services and industrial segments should help diversify its earnings risks while a larger market cap (if the future acquisitions are partly funded by equity) will improve its liquidity. At a 5.3% FY20E distribution yield, the valuation looks attractive.

Management Targets Property Value of RM13-15bn by FY2025

SREIT’s management targets to grow its property value to RM13-15bn by FY2025 (from RM8.0bn in end-FY19) and diversify its asset base by increasing the allocation for services / industrial assets. Broadly, we like the management’s plan, so long as the acquisitions are earnings-accretive. A diversified asset base should lower earnings risks while a larger market cap (if these acquisitions are partly funded by equity) should increase the REIT’s liquidity. While management has yet to share its acquisition targets, we believe that the asset pipelines (comprising retail, offices, education and medical assets) of the sponsor are good candidates for future acquisitions.

We Have Lowered Our Earnings Forecasts, But Still Expect Growth

We have lowered our FY20-22 EPU forecasts by 2%-5% after incorporating lower contribution from the hotel segment in view of the soft market conditions, and cut our revenue assumptions from Sunway Putra Mall. Despite the earnings forecast revisions, we are still expecting SREIT to report higher earnings in FY20E driven by contribution from Sunway University Campus, strong performance at Sunway Pyramid and revenue recovery (from a low base) at Sunway Resorts Hotel & SPA.

Maintain BUY With a Lower Price Target for RM2.00

In tandem with our earnings forecast revisions, we have lowered our DDM derived target price to RM2.00 (from RM2.08). We continue to like SREIT for its diversified portfolio, attractive yield (5.3% in FY20E), proactive management team and strong injection pipeline from its parent company, Sunway Berhad.

Source: Affin Hwang Research - 24 Oct 2019