KEY INVESTMENT HIGHLIGHTS

• Proposed to buy Sunway Pinnacle for RM450m

• Private placement to raise up to RM710m

• Earnings may be lifted by 0.3%/0.3% for FY21F/FY22F

• Maintain BUY with an unchanged TP of RM1.88

Proposed to buy Sunway Pinnacle for RM450m. Sunway REIT announced that it is proposing to purchase Sunway Pinnacle, a leasehold office tower in Sunway City for a consideration of RM450m based on DCF valuation as well as comparison methods. Sunway Pinnacle, a 24- storey building with a net lettable area of 1.15 sq ft and 855 parking bays, is certified Green Building Index with Multimedia Super Corridor. It also comes with three-storey mezzanine floors. The building is fully tenanted with gross annual rental income of RM36.4m as of end 2019.

Private placement to raise up to RM710.0m. The proposed transaction is expected to be fulfilled via a private placement to the tune of RM710.0m, out of which, RM405m will be allocated for the purchase of Sunway Pinnacle and RM295.3m for the capital expenditure of Sunway Carnival Mall. The remaining will be for the expenses related to the corporate exercises announced. The private placement is expected to further improve the trading liquidity in Sunway REIT units. Gearing is expected to fall below 38% following the private placement.

Earnings may be lifted by 0.3%/0.3% for FY21F/FY22F. Based on our estimation, the addition of Sunway Pinnacle may lift Sunway REIT’s earnings by 0.3% for FY21F/FY22F. We think that the purchase is in-line with Sunway REIT’s strategy to create a more diversified portfolio from being retail-focus previously. We believe the objective of this is to have a more stable income stream in the event of a slowdown in any particular sector. That said, we leave our earnings estimates unchanged pending more details in an upcoming briefing.

Maintain BUY with an unchanged TP of RM1.88. We like Sunway REIT for its integrated asset cluster in a mature township as well as management’s efforts in building a more balanced portfolio to create sustainable distribution growth in the medium to long-term. At current price, price to NAV of ~1.0x is deemed attractive while dividend yield is expected at 5.1%.

Source: MIDF Research - 30 Jun 2020