INVESTMENT HIGHLIGHTS

• Education asset acquisition completed

• Expect full year earnings to come within estimates

• Earnings for FY20F up by 1% to factor in the inclusion of the education asset

• Maintain BUY with adjusted TP of RM2.02 (previously RM1.93)

Education asset acquisition completed. Sunway REIT has completed the acquisition of its first education asset for RM550m. Of the full amount, RM340m is funded through perpetual note programme (perps). We think that the coupon rate for the perps will be higher than its existing loan interest rates of slightly over 4% but the purchase should still be earnings accretive as the debt to equity ratio is 38:62. We estimate that the new asset will make up about 5% of Sunway REIT’s total revenue for FY20F. Earnings contribution for FY19F is expected to be limited to two months. We also expect the one-off fees arising from the establishment of the perps to be minimal and will most likely be offset by the positive contribution of the asset.

Expect full year earnings to come within estimates. We expect the upcoming quarter core net income to be on par with the set of numbers in the previously corresponding period. We expect this to be supported by the positive rental income growth from Sunway Pyramid. Meanwhile, the improved office segment is offset by the weaker performance from the hotel segment. That said, the refurbishment work at Sunway Resort and Spa had come to an end towards end-2018 and we expect recovery in revenue from the hotel going forward.

Earnings for FY20F up by 1% to factor in the inclusion of the education asset. Looking ahead, we expect Sunway REIT to continue to balance its portfolio in order to achieve earnings accretion in the long run. This may include further acquisition of more assets from the “others” segment. Currently, Sunway REIT owns The Sunway Medical Centre, an industrial asset in Shah Alam and the education property other than its retail, hotel and office segments. We are positive on this strategy as the long-term tenancy agreement from this category may buffer the income volatility of the hotel segment, thus providing better stability for the REIT. Subsequently, we have included the contribution from the education asset into our earnings estimate for FY20F but leave FY19F estimate unchanged. We introduce our FY21F numbers.

Maintain BUY with adjusted TP of RM2.02 (previously RM1.93) as we roll over our base year. Our Dividend Discount Model-based valuation (required rate of return of 7.4%; terminal growth rate of 2.0%) is maintained. We like SUNREIT for its integrated asset cluster in a mature township and stable prospects from its crown jewel Sunway Pyramid Mall. Dividend yield is estimated at 4.8%.

Source: MIDF Research - 26 Apr 2019