INVESTMENT HIGHLIGHTS

• Maiden foray into industrial property

• Strategic location of the property

• Earnings accretive acquisition

• Maintain BUY with unchanged TP of RM1.83

Maiden foray into industrial property. Sunway REIT (SUNREIT) proposed to acquire an industrial property at Shah Alam, Selangor for a total purchase consideration of RM91.5m. Note that this is SUNREIT’s maiden foray into industrial property as SUNREIT is looking to diversify its asset base to strengthen income stability. Upon completion of the asset acquisition, SUNREIT’s number of assets will increase to 15 from 14 with a property value of RM6.52b.

Strategic location of the property. The industrial property is an office cum industrial building, strategically located in the prime industrial hub of Shah Alam, Selangor. The industrial property is currently leased to IDS Manufacturing (a contractor in the manufacturing of pharmaceutical products and food and toiletries products). The lease structure is on longterm triple net lease basis, which would expire in December of 2034. We understand that the rental rate is subject to review every 3 years.

Earnings accretive acquisition. We are slightly positive on the acquisition as we reckon that the asset acquisition is earnings accretive to SUNREIT whereby asset acquisition yield of 6.1% is higher than cost of borrowings of around 4.1%. Note that SUNREIT intends to fund the asset acquisition fully by debt. We estimate earnings contribution from the asset to lift SUNREIT earnings and DPU for FY18 by 1.8%. Meanwhile, we estimate net gearing of SUNREIT to be relatively unchanged at 0.34x post the asset acquisition.

Maintain BUY with unchanged TP of RM1.83. We maintain our earnings forecast for FY17/18 pending completion of the asset acquisition. Our target price is also unchanged at RM1.83, based on Dividend Discount Model (Required rate of return: 7.1%, Perpetual growth rate: 1.7%). Although the expected total returns are lower than our buy call threshold of +15% total returns, we continue to see value in Sunway REIT due to the resilient performance of its flagship Sunway Pyramid Shopping Mall which was underpinned by high occupancy rate (>98%) of the mall. Furthermore, we expect minimal downside risk from office division as we envisage office division to stage recovery in FY17.

Source: MIDF Research - 12 Jan 2017