SUNREIT has announced the acquisition of a 3.3ac (143.2k sf) vacant land adjacent to Sunway Carnival at Seberang Perai for RM17.2m. We are neutral to mildly positive as the near-term impact to earnings and balance sheet is minimal and the acquisition is still subject to SC’s approval as MREIT guidelines do not permit such greenfield asset injection. We maintain earnings forecasts and OUTPERFORM call with TP of RM1.74 on FY17E GDPS of 10.2 sen and +2.1ppt spread to the 10-year MGS of 3.80%.

Acquisition of vacant land for RM17.2m by 2HCY16. SUNREIT announced that it has entered into a sale and purchase agreement with Commercial Parade Sdn Bhd, an indirect wholly-owned subsidiary of Sunway Berhad, for the acquisition of a piece of 3.3ac (143.2k sf) vacant land for RM17.2m. The acquisition will be funded by cash and the land is located at Seberang Perai, Penang, adjacent to Sunway Carnival Shopping Mall (refer overleaf). This is to facilitate plans to increase net lettable area of Sunway Carnival with the construction of an extension of the existing mall comprising a 9-storey shopping mall on Lot 5493 inclusive of 6-storey parking bays above the retail space, and single-story parking bay at the basement. The acquisition is expected to be completed by 2HCY16 pending regulatory approvals.

We are neutral to mildly positive on this news. According to Clause 8.44(b) and Clause 8.44(c) of the REIT Guidelines, a fund is not permitted to conduct property development activities and the acquisition of a vacant land. As such, SUNREIT needs to obtain SC’s approval to conduct property development activities as it is an acquisition of a vacant land (a.k.a greenfield asset), and it is likely that SUNREIT will not proceed with this acquisition without SC’s approval. Additionally, as the project is still at planning stages, details are scarce, with the size of the mall and pricing not finalised. However, assuming the acquisition materialises, we do not expect any material impact to earnings in the near term as construction will likely commence as early as 2HCY17 and may take up to 3-4 years to complete, likely by CY20.

Estimating development cost of RM138m and slight increase in FY16E gearing to 0.35x (from 0.34x). Based on most developers under our coverage, assuming land cost makes up c.10-15% of total asset value (TAV), we believe the asset value for the extension could be up to RM172m (10% land cost assumptions), which only makes up to 2.6% of SUNREITs current TAV of RM6.5b. As for funding the project, assuming development cost makes up an additional 70%, we reckon that development and land cost combined is RM138m, which is also minimal and would only increase FY16E gearing ratio slightly to 0.35x (from 0.34x), assuming the full development cost will be funded by debt. Hence, we believe this will not prompt a cash call for funding purposes.

No changes to earnings for now, as there is no near term impact to earnings. Maintain FY16E-17E earnings of RM254-271m. We are estimating gross yields of 5.7-6.2% (net: 5.1-5.6%).

Maintain OUTPERFORM call with TP of RM1.74, based on FY17E target gross yield of 5.9% (net: 5.3%), on unchanged +2.1ppt spread to the 10- year MGS of 3.80% on FY17E GDPS of 10.2 sen (NDPS: 9.2 sen). We maintain OUTPERFORM call for its income contribution from SPP and visible acquisition pipeline. SUNREIT is commanding potential 11.4% total returns at current level.

Source: Kenanga Research - 21 Jun 2016