News   Sunway REIT (SUNREIT) has proposed 1) the acquisition of Sunway Medical Centre ('SMC') for RM310.0m (same as market value); 2) placement of up RM320.0m at an issue price; 3) to seek approval to increase existing approved fund size of up to 870.8m units. Proposals to be completed by 3Q13.  The cash from placement of RM320m will be used to fully fund acquisition of SMC and proposal expenses. 

 SMC's initial term net property yield of 6.1% is close to its portfolio's average of 6.4% and since SMC is only 6% of the enlarged investment property value of RM4.9b, we believe its portfolio net yield will be maintained. Hence, this also implies the asset value is fairly priced. However, retail asset (segment which has exposure has reduced to 63% from 67%. 

 The new placements of up to 20% of its fund size imply up to 262.30m new units. However, we believe they will place out lesser units given substantial YTD share price performance while they only need to raise RM320m. Assuming a placement price of RM1.45 (3% discount to last 5-day VWAP assumption), only 220.69m new units need to be issued. Upon completing both the placements and acquisition concurrently (we assume by 01/01/13), 3Q13 gearing should be lowered to 31% from 33%.

 We are NEUTRAL as there are no major GDPU accretions as FY13-14E GDPU increases by <1% each to 7.9 sen-8.2 sen (5.1%-5.3% gross yield)*. However, the proposals show the groups ability to tap onto its parent's strong asset pipeline and provide greater absolute dividend growth potentials, whilst its market cap grows by c. 7% to RM4.5b. Consequently, SunREIT will become the second largest M-REIT oppose to its current 4^th largest by market cap or a boon to liquidity. 

Outlook  Expecting c.RM2.7b worth of asset injections (e.g. Sunway University, Sunway Giza Shopping Mall) over the next 3-5 years. Management mentioned they hope future asset injections will increase retail exposure back to 67% as they intend to remain retail focused.

Forecast  Increase in FY13E-FY14E RNI by 4.5%-8.9% post acquisition. (Refer to overleaf).

Rating Maintain MARKET PERFORM

 The proposals are minimally dividend yield accretive while its retail asset exposure, which has the highest organic growth amongst other segments, has decreased. We may look to upgrade our call if retail exposure becomes higher than pre-acquisition ratios or if there are more yield accretive acquisitions.

Valuation   Maintaining TP of RM1.51 based on targeted FY13E net yield of 4.7% 

Risks  Retail sector risks. Sector de-rating if investors switch to higher beta developers