We maintain NEUTRAL on Sunway REIT, with a revised DDM-based TP of MYR1.55 (3.1% upside) after updating our key assumptions. Sunway REIT  has  announced  the  proposed  acquisition  of  two  assets  from Sunway  Berhad  for  a  total  consideration  of  MYR134m.  Although  yield-accretive,  the  assets  are  relatively  small  in  size  (2.3%  of  the  enlarged portfolio base), thus the overall DPU enhancement is less than 5%.  
 
New  injections  from  its  sponsor.  Sunway  REIT  (SunREIT)  has announced  that  it  will  be  injecting  two  assets  from  its  sponsor,  Sunway Berhad (SWB MK, BUY, TP: MYR3.90). These assets are Sunway Hotel Georgetown  (SHG)  in  Penang  and  Wisma  Sunway  Property  (WSP)  in Shah Alam. The total consideration for these assets is MYR134m. Yields are  relatively  decent  for  the  acquisitions,  at  about  6%  for  SHG  and  9% (net) for WSP. The acquisition of SHG is due to be completed in 3QFY15 (FYE  June)  while  WSP  is  expected  to  be  injected  in  1QFY16.  The differences  in  timing  are mainly  due  to  the different  asset  tenures.    The acquisitions  will  be  fully  funded  through  debt.  Post-acquisition, management  expects  gearing  to  rise  slightly  to  33.5%  (from  32.0% currently), which we believe is still manageable.

Not  a  significant  game-changer.  Although  yield  accretive,  the  two assets  only  represent  about  2.3%  of  the  enlarged  portfolio  base  of MYR5.6bn.  We  are  more  positive  on  the  prospects  for  SHG,  given  its location  in  the  heart  of  the  bustling  Georgetown,  stable  occupancy  of about 78% and its competitive average room rate of between MYR190 – 200. We are slightly wary of WSP, given that: i) it is a strata-titled office, hence not fully owned by SunREIT; and ii) more than 90% of its existing tenants are made up of government tenants. That being said, its current rental  rate  of  MYR3.50  –  3.60  psf  is  rather  decent  under  the  current environment.

Forecasts. Our FY15-17 DPU forecasts have been revised upwards by less than 5% after factoring in the contribution from the assets.

Maintain NEUTRAL. Our TP is now higher at MYR1.55 (from MYR1.42) after  revising  some  of  our  key  valuation  parameters  in  line  with  our house view. We reiterate that SunREIT’s potential re-rating  catalyst  will be the injection of sizeable yield-accretive assets.

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

Sunway REIT is a large-cap diversified MREIT, with exposure in the retail, commercial, hospitality and healthcare segments.

Recommendation Chart

Source: RHB