Our recent visit to Sunway Putra Mall unveils a new and improved mall which was above our expectations. Maintain NEUTRAL and DDM-based TP of MYR1.64 (8.6%s upside). We think that SunREIT’s retail segment will continue to contribute strongly to the portfolio and offset the underperformance of both its office and hospitality segments which are facing headwinds. Dividend yield also remains decent at 6.7% FY17F.

A visit to Sunway Putra Mall. We recently visited Sunway REIT’s (SunREIT) Sunway Putra Mall, which was re-opened to the public back in May 2015. The newly refurbished mall was a stark contrast to its previous condition and above our expectations. We think the mall will do well in the future given the potential catchment surrounding the area, good accessibility and interesting tenant mix.

SPH to be fully operational end-2015. The hotel is currently facing low occupancy (c.20%) due to the ongoing refurbishment of the hotel rooms and slow hospitality demand. That said, we think that the hotel will be able to attract more customers once it is fully reopened, as we find the ambience and facilities similar to that of SunREIT’s Sunway Resort Hotel and Spa in Bandar Sunway and the room rates are reasonable.

Other updates. The office segment will remain challenging for SunREIT with Ranhill WorleyParsons and Suruhanjaya Koperasi Malaysia (SKM) leaving Sunway Tower and Sunway Putra Mall this year. Although there are prospective tenants, we think upcoming rental rate for new tenants will likely bring down the average rate for Sunway Tower. Nevertheless, filling in the vacancy is more important, in our opinion.

Maintain NEUTRAL. We maintain our earnings forecasts and reiterate our NEUTRAL recommendation with a DDM-based TP of MYR1.64(8.6% upside). Given the potential revenue that can be unlocked from the full opening of Sunway Putra Place, the steady rental growth from Sunway Pyramid and potential pipeline asset injections, we think that investors should maintain their exposure in the REIT. With 6.4-6.7%dividend yield, SunREIT provides defensive exposure, especially during the current challenging equity market conditions.

A visit to Sunway Putra Mall We recently visited Sunway Putra Mall (SPM) which was re-opened back in May 2015. The newly refurbished mall is now a stark contrast to its previous condition and above our expectations. The mall currently ha an ambience and tenant mix similar to the REIT’s high performing mall, Sunway Pyramid (SP) in Bandar Sunway .SPM is divided into four precincts, namely: Asian Avenue, Selera Street, Marketplace and Vanity Avenue. Asian Avenue showcases an eclectic mix of products made in Asia or by Asian designers. Marketplace is an area on the lower ground floor dedicated to a mixture of local and international cuisines while Selera Street mainly concentrates on local Malaysian street food. Aside from that, the mall also has Vanity Avenue where the area is dedicated towards beauty products from well-known brands such as: Laura Mercier, M.A.C and Inglot. The REIT also disclosed that it is currently in the final stage of negotiations with an international brand which will have its first presence in Malaysia via SPM – should all go well. As an incentive to potential tenants, the REIT is offering a 3-month rent free period to facilitate the tenants during the soft period post-opening of the mall. All in, we think that the mall has an interesting tenant mix of both the popular and of newcomers to the market, such as Diptyque, Swarovski and Uniqlo. These could potentially capture the nearby high-end residential dwellers such as from Bukit Tunku to the mall, aside from the normal crowd from the nearby offices.

From our observation, the traffic flow at the mall is still relatively slow even during lunch hour, while the vehicular traffic in the recent month of July was recorded at 50,000 (the hotel and office also share the same carpark space) . However, we note that this is typically normal for a newly opened mall – which requires 6-9 months to start gaining traction and two years to stabilise. Additionally, as mentioned in our recent report Sunway REIT : Cautious Outlook For FY16, the REIT currently has 82% committed tenants for SPM. However, physically, only 70% of the stores have opened. This is mainly due to the mall being opened in two phases. Phase 1 involves the opening of the lower ground floor until level 4 of the mall, while Phase 2 is for the two remaining upper floors (Level 5 and 6, NLA: 45,000 sq ft), that currently have yet to be opened to the public. The REIT shared that, part of the u pper floor will be occupied by Tanjung Golden Village (TGV) cinemas – which is currently waiting for the approval from the relevant authority to begin its operations at the mall. We arepositive on this, as the REIT also mentioned that the cinema will be a “Revolutionary Beanieplex”, - the first of its kind in Malaysia, where it will be offering only beanietype seating vs various types of seating at other TGV cinemas. We think that the cinema will be a catalyst that will drive more shopper traffic and assist in attracting future potential tenants to fill up the remaining unoccupied spaces in the mall.We are also positive on the potential shopper traffic to the mall due to the connectivity of the mall to various buildings and mode of transportations. The mall is currently directly connected to Sunway Putra Hotel (SPH) and Sunway Putra Tower (SPT), which are both located beside the mall. Additionally, there is a pedestrian bridge built to connect the mall to the Star Light Rapid Transit (Star LRT), Keretapi Tanah Melayu (KTM) Komuter train and Seri Pacific Hotel located opposite the mall. There are also the Putra World Trade Center (PWTC) and UMNO building adjacent to the mall – which, during times events are held, tend to have a high number of visitors and this is hoped to spill over to the mall as well, in the future. In the longer term, we think that aside from the office crowd, with the good connectivity in place, it will help to atract crowds even on weekdays, and not only on weekends. On another note, we noticed that there were plenty of unoccupied spaces due to the mall’s pillars that constrain the placement of sizeable tenants on its lower ground floor where Marketplace is located. We think that the space could potentially be used as “room for expansion” as it could be leased out to smaller tenants using kiosks or push carts that could further boost its revenue in the future. We also anticipate the scarcity of malls in SPM’s vicinity, as well as the potential remixing of the tenantspost its first rental cycle, to continue to increase the attractiveness of the mall.

Sunway Putra Hotel to be fully operational end-2015 Our visit to SPM’s neighbour, which is Sunway Putra Hotel (SPH), reaffirms our view that the hospitality segment will continue to face headwinds in the medium term. This would be due to the weak demand for luxury hotels in the current challenging global environment, as well as the ongoing refurbishment in the hotel. According to the REIT, it has recently completed the refurbishment of the hotel’s common areas. This includes the hotel’s lobby, lounge, coffee house and the grand ballroom. Additionally, the hotel now has a brand new business centre, where several new meeting rooms were constructed to cater for business functions. Upon entering the hotel, we feel that the ambience of the hotel post-refurbishment mimics that of Sunway Resort Hotel and Spa in Bandar Sunway, Petaling Jaya.

The occupancy rate of the hotel is still low at 20%, as this is partly due to the ongoing refurbishment of the hotel rooms. The hotel will have 650 rooms post-refurbishment (from 618 previously) and currently, 366 rooms have been refurbished. The REIT expects the remainder of the rooms to be refurbished and the hotel to be fully operational by end of this year. Going forward, the management would increase itsadvertising and promotion efforts to increase the occupancy rate of the hotel and will target tour groups as well as appoint external agents (ie: hotel booking websites, travel agents etc) to attract customers to stay at the hotel. We think that the hotel will be able to improve on its occupancy rate due to: i) good accessibility; ii) having the markings of a 5-star hotel; iii) strategic position near Kuala Lumpur City Cent re; and iv) decent room rates - at an average of about MYR200 per room.

Source: RHB Research - 17 Aug 2015