Earnings Dilution, Share Overhang May Cap Upside

• We are cautious of the slower pace of recovery in the retail segment and weak earnings outlook in the hotel segment.
• SREIT also faces EPU and DPU dilution in FY21E arising from the acquisition of The Pinnacle Sunway and expansion of Sunway Clio Mall through a private placement exercise to raise proceeds of up to RM710m.
• Due to the above concerns, we lower our EPU and DPU forecasts by 4-8% for FY21-23E. Downgrade SREIT to a HOLD with a lower target price of RM1.65. At 5.1% CY21E dividend yield, valuation looks fair.

The Retail and Hotel Segments Remain a Concern

The Covid-19 pandemic has adversely affected Malaysia’s retail and hospitality sectors. In FY20, SREIT’s retail and hotel revenue declined by 15% and 13% yoy respectively. Nonetheless, SREIT’s diversified portfolio has mitigated the impact, as full-year contribution from the Sunway Campus and other segments provided some earnings stability. Looking ahead, we remain concerned on these segments in view of: (i) slow recovery in the retail and hospitality market; and (ii) the removal of minimum rental guarantee (under renewed tenancy agreements) for Sunway Resort, Sunway Pyramid and Sunway Hotel Seberang Jaya. In particular, we foresee prolonged weakness in the hotel segment in FY21-FY23E.

Earnings Dilution From the Placement of New Shares

In June 2020, SREIT proposed to: (i) acquire The Pinnacle Sunway (an office tower) from its parent company, Sunway Berhad for RM450m; (ii) execute a private placement to raise gross proceeds of up to RM710m. Assuming an issuance price of RM1.58, SREIT may issue up to 450m new shares and enlarge its share base by 15.3%; and (iii) establish a distribution reinvestment scheme. While we believe that diversifying the asset portfolio is a good strategy, we do not view favourably the placement of new shares under the current market conditions.

Downgrading to a HOLD With a Lower Target Price of RM1.65

We cut our FY21-23E distributable EPU and DPU forecasts by 4-8% after incorporating: (i) positive revenue and NPI contribution from The Pinnacle Sunway; (ii) lower finance costs; and (iii) earnings dilution from the issuance of new shares. In tandem, we lower our DDM-derived price target to RM1.65 (from RM1.75) and downgrade SREIT to HOLD (from BUY). At a CY21E dividend yield of 5.1%, valuation is trading within its 5-year average, which looks fair.

Source: Affin Hwang Research - 24 Aug 2020