We visited Sunway University campus yesterday, followed by a meeting with management, and came away feeling neutral and reassured on the Group’s capital management. SUNREIT emphasised that future acquisitions will prioritise DPU accretion, which may be funded by a combination of perpetual bonds and existing borrowings or equity. In the longer run, SUNREIT may diversify its portfolio to industrials and other segments for more long-term and stable lease profiles. Maintain MP on TP of RM1.85.

Site visit to Sunway University. Yesterday, we visited SUNREIT’s latest acquisition, Sunway University, which was acquired for RM550m, funded by a combination of existing borrowings facilities of RM210m, and the recently proposed perpetual bond facility of RM340m (completed on 15th April 2019). To recap, this latest asset commands 6.2% NPI yield, which is decent vs. the portfolio yield of 6.0%. This acquisition also remains DPU accretive post the perpetual bond financing, albeit at only 1.6% DPU accretion in FY20. Additionally, due to the perpetual bond, gearing is manageable at 0.38x (from 0.39x pre- acquisition vs. increasing to 0.43x if this asset was fully funded by existing borrowings facilities). (Refer overleaf for details.).

Future acquisitions to prioritise DPU accretion. We are comforted by the fact that SUNREIT opted to utilise the perpetual bond facilities (which tend to command a higher borrowing rate of c.6.0%), with existing borrowing facilities (which command a lower borrowing rate of 4.0%), while SUNREIT also reassured investors that going forward, they would maintain a combination structure should acquisitions be funded via borrowings, with the key criteria being to ensure that future acquisitions are DPU accretive. We are positive on this as ensuring DPU accretion for future acquisitions was our main concern when SUNREIT first announced plans to establish a RM10b perpetual bond program for future financing (refer to our report dated 29th March 2019, DPU Accretion is Paramount).

Diversifying portfolio. SUNREIT remains cognisant of the challenging retail, office and hospitality segment, and maintains its plans to diversify upcoming acquisition segments. In the longer run, the Group favours acquiring industrial assets (which include logistic hubs, data centres, e- commerce warehouses), education assets as well as medical centres that provide long-term stability via long-term leases, rental guarantees or pre-agreed step-up’s (refer to overleaf).

Maintain FY19E CNP but lower FY20E CNP marginally by 1.6% post accounting for slightly higher financing cost from the perpetual bonds in FY20. FY19-20E CNP of RM299-307m are buoyed by low single-digit reversions. FY19-20E GDPU/NDPU of 10.2-10.4/9.1-9.4 sen implies 5.3-5.4% gross yield (4.8-4.9% net yield).

Maintain MARKET PERFORM and Target Price of RM1.85. Our TP remains unchanged despite a slightly lower FY20E GDPU of 10.4 sen (from 10.6 sen) and an unchanged +1.8ppt spread to the 10-year MGS target of 3.90%. At current levels, SUNREIT is commanding decent yield of 5.5% which is close to large cap MREIT peers’ average of 5.5% while we also believe we have already priced in most positives for now (refer overleaf).

Source: Kenanga Research - 15 May 2019