• Acquiring Sunway Clio for RM340m

• Sunway Clio enjoys high occupancy rate

• Net gearing to be lifted marginally

• Maintain BUY with an unchanged TP of RM1.88

Acquiring Sunway Clio for RM340m. Sunway REIT announced that it has entered into a sale and purchase agreement to acquire Sunway Clio from Sunway Berhad for RM340m. Sunway REIT also announced that it has entered into hotel lease agreement with Sunway Berhad for the leasing of Sunway Clio to Sunway Berhad with an initial term of 10 years. The asset acquisition is expected to complete in 4QFY17.

Sunway Clio enjoys high occupancy rate. Sunway Clio is located within the township of Sunway City, in close proximity to Sunway Resort Hotel & Spa. Sunway Clio is a 19-storey 4-star rated hotel with 401 rooms. Besides, Sunway Clio is also having 88,384 sq ft of retail space. We are positive on the acquisition as Sunway Clio is enjoying high occupancy rates since its opening in February 2016. Note that Sunway Clio hotel is enjoying occupancy rate of 71.6% while Sunway Clio retail registers occupancy rate of 88.2% due to its strategic location in Sunway City.

Net gearing to be lifted marginally. Sunway REIT intends to fund the acquisition via borrowings. We estimate net gearing of Sunway REIT to be lifted from 0.35x in 3QFY17 to 0.38x post acquisition of Sunway Clio. Sunway REIT is expected to generate minimum rent of RM11m (for year 1 and year 2) or variable rent (largely depends on profit from Sunway Clio), whichever is higher. Besides, Sunway REIT is also expected to gain at least RM5m per annum from Sunway Berhad for the lease of car park in Sunway Clio. On the other hand, borrowings cost is expected to increase by RM13.6m based on our financing cost assumption of 4%. Overall, we are maintaining our earnings estimates pending completion of the acquisition.

Maintain BUY with an unchanged TP of RM1.88. Our TP is based on Dividend Discount Model (Required rate of return: 7.1%, Perpetual growth rate: 1.9%). We continue to like SUNREIT for its quality retail assets namely Sunway Pyramid and Sunway Carnival which will support its earnings growth going forward.

Source: MIDF Research - 4 Aug 2017