• Maintain BUY, new MYR1.74 TP from MYR1.60, 15% upside and c.7%FY24F yield. Sunway REIT’s diverse property portfolio is expected to driveearnings growth, particularly due to its resilient retail properties andrecovering hospitality assets. While near-term earnings will be impacted byongoing asset enhancements, in addition to an uncertain timeline for theacquisition of six hypermarkets, we believe the REIT’s longer-termprospects remain strong, as it aims to grow its asset value to MYR14bn by2027 (currently MYR8.7bn).

• Significant asset enhancement initiatives (AEIs) for retail. SunwayPyramid mall is in the midst of reconfiguring the space previously occupiedby Aeon (11% of NLA, 2% of the mall’s revenue) to cater for a wider varietyof higher yielding tenants, and will welcome Jaya Grocer as a new anchortenant. The AEI is expected to be completed in 4Q24. Sunway Carnival,which opened its new wing in Jun 2022 (NLA rose to c.710k sq ft fromc.450k sq ft), is now undergoing the second phase of its AEI to refurbish theolder wing. The AEI is expected to be completed by 2Q25. While theeffective occupancy rate will take a hit while refurbishments are ongoing,we think it will be partially offset by higher rental reversion.

• Hotels and offices. In 1H23, the average hotel occupancy was at 60%, upfrom 48% in 1H22 (FY22: 54%). We expect occupancy to gradually recoverto the pre-pandemic level of 70%, and for average room rates to remainhigh – especially for Sunway Resort, following its completed renovationworks. For offices, the average occupancy is at 83%, dragged by SunwayTower (27% occupancy). We expect office properties to record low singledigit rental reversion, aside from Sunway Tower which could see negativereversions to maintain/improve occupancy.

• Acquisitions delayed. The deadline to complete the acquisition of sixhypermarkets for a purchase consideration of MYR520m has beenextended from end-September to end-November, as it is still pendingregulatory approvals. With the disposal of Sunway Medical Centre forMYR430m already completed at end-August, the loss of income (c.4% ofFY22 revenue) will be felt until the acquisition is completed. Nevertheless,FY24 should be a strong year as the hypermarkets provide a high 8% NPIyield, and are on a long-term triple-net lease with fixed rental increments.

• Earnings estimates. We increase our FY23-24F earnings estimates by 2-5% and introduce our FY25F forecast of MYR373m. We also cut our ESGscore to 3.2 from 3.4 (our TP now includes a 4% ESG premium) afternormalising the scores across our coverage. Key risks: Lower-thanexpected occupancy and rental reversion, longer-than-expected delays inacquisitions, and higher-than-expected costs.

Source: RHB Securities Research - 6 Nov 2023