SUNREIT acquired Sunway Clio Property for a proposed consideration of RM340m, to be completed by 2Q18. We were surprised but neutral-to-mildly positive on the acquisition as impact to earnings is not significant (1% in FY18), but we favour the long-term leases which provide sustainable earnings. As such, we increase our FY18E Net Profit mildly by 1% to RM294. Maintain OUTPERFORM but increase TP slightly to RM1.90 (from RM1.86).

Acquiring Sunway Clio for RM340m. SUNREIT entered into a conditional SPA with Sunway Forum Hotel Sdn Bhd, a wholly-owned subsidiary of Sunway Berhad for the proposed acquisition of Sunway Clio Property for a purchase consideration of RM340m. Sunway Clio consist of: (i) a 19-storey 4-star rated hotel with 401 rooms, (ii) 3-storey retail lots (known as Sunway Pyramid West) with reputable names such as Starbucks, The Parenthood, Hokkaido Ramen and Sanook, and (iii) a 6-storey podium car park and 4-storey basement car park, and is strategically located close to the West precinct of Sunway Pyramid Mall and close to Sunway Lagoon. The conditional hotel lease is for a 10+10 years term and will be funded by SUNREIT’s existing debt program. The acquisition is expected to be completed by 4QCY17 (2Q18).

Neutral to mildly positive on the acquisitions with c.6% NPI yield. We were fairly surprised by this acquisition as we did not expect SUNREIT to acquire Sunway Clio so soon being a 1.5-year old asset while most acquisitions were made post one reversion cycle (2-3 years). However, we are neutral on the acquisition as we estimate NPI yields of 6% based on the Deed of Undertaking of RM20.2m for 4 years which is decent vs. SUNREITs portfolio yield of 5.8% in FY16. (refer overleaf). However, we like the long-term lease as it provides sustainable earnings over 10 years. Additionally, being a 4-star hotel, Sunway Clio will be impacted by the recently imposed tourism tax (effective 1st Aug 17), but we are not overly concerned as the quantum of RM10/pax/day is minimal vs. room rates. However, we are also not overly optimistic on occupancy rates, targeting flattish occupancy going forward.

No significant impact to earnings. All in, we expect no significant impact to earnings post the acquisition which will only accrete in 2H18 onwards. As such, we leave FY17E numbers unchanged and increase FY18E Net Profit by 1% to RM294m due to half-year contributions. Post the acquisition, we expect FY18 gearing to increase to 0.39x (from 0.36x).

Outlook. Management is targeting to spend c.RM100m on capex in FY17 for the refurbishment of Sunway Pyramid Hotel East, which we have already accounted for in our estimates. In terms of leases up for expiry, FY17 has 22.0% of NLA up for expiry and it is a major rental reversion year for Sunway Pyramid (54%) and Sunway Carnival (72.0%) of which we expect mid-to-high single-digit reversions, while FY18 will only see 15.4% leases up for expiry.

Maintain OUTPERFORM but increase TP to RM1.90 (from RM1.86) after rounding up our TP based on FY18E GDPS of 10.0 sen (from 9.9 sen) and target gross yield of 5.3% (net: 4.8%) on a +1.30ppt spread to the 10-year MGS target of 4.00%. Our applied spread is slightly higher than retail MREIT peers’ average yield of 5.4% due to earnings fluctuations in SUNREIT’s office and hotel segments. Even so, at current level, SUNREIT is commanding gross yields of 5.8% (on FY18E), which is slightly better than MREITs’ peers (>RM1b market cap) at 5.6%, warranting an OUTPERFORM call.

OTHER POINTS

SunCity (a wholly-owned subsidiary of Sunway), also entered into a Deed of Undertaking (DOU) with the Trustee to pay annually the difference between: (a) the total annual property income received in any fiscal year by the Trustee in relation to the Sunway Clio Property (excluding the Podium Car Park) minus all relevant outgoings and other costs to be incurred by the Trustee (excluding all outgoings and other costs attributable to the Podium Car Park); an aggregate amount of RM20.2m , for a period of 4 years commencing from the day immediately after the Completion Date.

Risks to our call include: (i) bond yield expansion, (ii) earnings risks in hospitality and office division, and (iii) lower-thanexpected contribution from SPP.

Source: Kenanga Research - 4 Aug 2017