We are neutral with SUNREITs acquisition of Sunway University from SUNWAY for RM550.0m. We were not overly surprised by the acquisition as there have been indications by management, while NPI yields are decent at 6.2% vs. SUNREITs portfolio of 6.0%. Overall impact to earnings is minimal, prompting a marginal increase of 0.6-3.3% to FY19- 20E CNP. Maintain MARKET PERFORM but increase TP to RM1.65 (from RM1.60) upon rolling forward to FY20E.

Acquiring Sunway University for RM550m. SUNREIT signed a SPA to acquire lands and buildings from SUNWAY for RM550m. The acquisition entails 3 parcels of leasehold land together with buildings comprising of a 5-storey academic block along with a lower ground level (South Building), a 6-storey academic block along with a lower ground level (North Building), a 13-storey academic block together with a 2-storey basement car park (New University Block), 4 blocks of 5- storey walk up hostel apartment (Hostel) and sports facilities. The acquisition is expected to be funded by borrowings, and completed by 2HFY19.

Positive in the long run. We are not overly surprised by the move as SUNREIT has always looked to acquire SUNWAY’s assets. We believe the acquisition price is decent as it commands an estimated NPI yield of 6.2% vs. SUNREITs portfolio yield of 6.0%. The impact to earnings is fairly neutral at 3.3% in FY20. However, we like the fact that the acquisition provides SUNREIT with a stable and sustainable income stream over the next 30 years, which is the longest least tenure among MREITs under our coverage (usually between 3 – 15 years). This will increase SUNREITs weighted average lease expiry (WALE) to 4.39 years (from 1.99 years).

Outlook. FY19E capex will mainly be allocated for Sunway Carnival Extension, with construction beginning in 2H18 till 2H21. As such, we are expecting capex of RM120-250m in FY19-20. FY19 is not major lease expiry year (8.6% of NLA), but FY20 will see 41.1% of NLA up for renewal. At present, we expect mid-single-digit reversions for retail, and flattish to low-single-digit reversions for office and hospitality assets. Additionally, the Group is looking to grow the Others segment more actively over the longer run (i.e. industrial, healthcare, education, etc).

Increase FY19-20E CNP by 0.6-3.3% to RM300-312m. We expect minimal impact to earnings for now on marginal step up rates for the new acquisition of c.2% p.a. All in, we expect gearing to increase to 0.43-0.45x in FY19-20E (from 0.40-0.42x). We reckon that SUNREIT may opt to raise equity financing in the near term as its gearing is close to MREITs maximum gearing limit of 0.50x. FY19-20E NDPU of 9.2-9.5 sen translates to 5.6-5.8% net yield.

Maintain MARKET PERFORM but increase TP to RM1.65 (from RM1.60). Our TP is based on a rolled forward FY20E GDPS/NDPS of 10.6/9.5 sen (from FY19E) and an unchanged +2.2ppt spread to the 10-year MGS target of 4.20%. Our spread is on the higher end vs. pure retail MREITs spread of +1.4 to +2.1ppt (save for CMMT at +2.4ppt due to its challenging assets) as we are mindful of certain asset weakness’ in the office and hospitality segment, and have accounted for this in our estimates and valuations. We are comfortable with our MARKET PERFORM call as SUNREIT’s gross yields of 6.5% is close to large cap MREIT peers’ average of 6.3% while we also believe we have already priced in most positives for now.

Source: Kenanga Research - 26 Dec 2018