News  SUNREIT announced the acquisition of two properties from its parent SUNWAY via its subsidiaries. The assets comprise of Sunway Hotel Georgetown in Penang (worth RM74.0m) and Wisma Sunway in Shah Alam, which is an office asset (worth RM60.0m)

Comments  We were taken by surprise by the acquisition as it has been tough for MREITs to acquire assets over the last couple of years due to the low cap rate environment.

 Valuation-wise, we think the asset pricing is fair as Sunway Georgetown Hotel’s implied yield is 5.9%, which is within the range of SUNREITs other hotel assets of 5.3%-7.0%.

 Wisma Sunway’s implied yield of 7.9% is on the high-end compared to SUNREIT’s other office assets and average of 6.4% and we believe the conservative asset valuation is a positive for SUNREIT. However, total consideration for the asset acquisitions of RM134.0m is relatively insignificant compared to SUNREIT’s total asset base of RM5.6b.

 SUNREIT is funding the acquisition completely via borrowings. Post the acquisition of both assets, we expect our FY15E-FY16E net gearing to increase to 0.35x (from 0.33x).

 All in all, we view these acquisitions as mildly yield accretive as FY15-16E core earnings will increase by 0.2%-0.8% to RM247m-RM282m after taking into account the new asset contributions and increased finance cost from the acquisition. The bulk of earnings accretion will be recognised in FY16E as the acquisition of the hotel is expected to be completed by 3Q15 and Wisma Sunway by 1Q16.

Outlook  SPP completions and Sunway Hotel Georgetown acquisition are expected to be completed in 1QCY15 (3Q15).

 Additionally, with Wisma Sunway coming onboard in 1Q16, we expect FY16 to see strong DPU growth.

Forecast  Raising FY15-16E core earnings by 0.2%-0.8% to RM247m-RM282m due to the reasons mentioned above.

As a result, we expect FY15E-FY16E DPU to increase by 0.2%-0.8% to to 8.9sen-10.2sen (5.9% - 6.8% yield).

Rating Upgrade to OUTPERFORM (from MP)

Valuation  Post the said acquisition, our TP only increases to RM1.57 (from RM1.56) due to the small size of the acquisitions based on our FY15F/FY16F GDPU.

 We have decided to roll forward SUNREIT’s valuation to FY16 (from FY15F/16F) to better encapsulate the earnings from SPP and the 2 new acquisitions. As such, we upgrade SUNREIT to OP (from MP) and TP to RM1.68 (from RM1.56) based on FY16E target gross dividend yield of 6.1% (net: 5.5%) or a +2.3ppt spread to the 10-year MGS of 3.80% on FY16E DPS of 10.2 sen.

 We believe SUNREIT warrants an OUTPERFORM due to the strong GDPU growth in FY16E mainly due to yield accretive AEI at SPP, while the stock is commanding potential 17.9% total returns at current levels.

Risks to Our Call (i) Bond yield expansion, earnings risks due to hospitality and office division.

Source: Kenanga