• Maintain BUY, with new DDM-derived MYR1.77 TP from MYR1.74, 12% upside and c.7% FY25F yield. We believe Sunway REIT’s diverse property portfolio and active acquisition strategy will be its key earnings driver. In the medium term, retail rental rates should be boosted following the ongoing asset enhancement initiative (AEI) in Sunway Pyramid and Sunway Carnival, as well as our expectation of hotel room rates remaining high as occupancy rates continue to improve. With gearing at 43%, the REIT will likely need to fund future acquisitions via equity.

• Retail outlook remains strong. While management is guiding for a normalised mid-single digit rental reversion for its retail properties, we should see a boost to rental rates after the AEI is completed in Sunway Pyramid and Sunway Carnival in 4Q24 and 2Q25. Until then, the occupancy rate for Sunway Carnival (1Q24: 86%, 2023: 97%) may stay at the 80-85% range, but management is confident that it will recover to >90% after the AEI is completed. YTD, management has seen encouraging operational metrics with both footfall and retail sales higher YoY despite Sunway Pyramid seeing a slight drop in footfall YoY.

• Gearing is high at 43% post completion of six hypermarket acquisitions in April, and it could rise to 44% after the acquisition of 163 Mall (MYR215m) is completed in 2H24. The REIT should still be active in its acquisition activity as it has a MYR14-15bn asset value target by 2027 (from c. MYR9.7bn after 163 Mall). Given the inorganic growth target, we reasonably expect future acquisitions to at least be partially funded via equity. Currently, the REIT is also in the midst of acquiring an industrial property in Prai, Penang, for MYR67m.

• Positive trend for hotels. Hotel room occupancy rates are likely to trend upwards, driven by an improvement in tourist arrivals and business activities. As such, hotel room rates look set to stay at above pre-pandemic levels, with no pressure on hoteliers to lower room rates as of yet.

• Earnings estimates. We make minor adjustments to our FY24F-25F earnings, and introduce FY26F of MYR371m. Our TP includes a 4% ESG premium based on our in-house methodology. Key risks: Lower-than- expected occupancy and rental reversion, longer-than-expected delays in acquisitions, and higher-than-expected costs.

Source: RHB Research - 24 Jun 2024