• Maintain BUY, new DDM-derived MYR2.07 TP from MYR1.94, 12% upside with c.6% FY25F yield. We recently attended Sunway REIT’s Investor Day, which focused on its recalibrated Transcend 2027 goals and commitment to sustainability. We also had a guided tour of Sunway Pyramid’s new Oasis wing, which changed from having one anchor tenant to >100 and at higher rental psf rates. We still like the stock – premised on the REIT’s solid organic and inorganic growth prospects, driven by its diversified asset portfolio.

• Looking for more external acquisitions. To add to our previous report on the REIT’s strategic roadmap, management highlighted that the MYR1bn in external acquisitions since mid-2023 exceeded the cumulative amount reached previously. We think these purchases have been productive, securing high-yielding assets with strong positioning in their respective sub- segments. For example, the six giant hypermarkets (MYR520m) immediately recorded a fair value gain of MYR73m, providing a yield of 8%, and enhancing the REIT’s long-term earnings with a WALE of nine years vs SREIT’s FY23 WALE of four years. Management expects to purchase more third-party assets, to reach its MYR14bn asset value target (currently at MYR10bn), as the pipeline from its sponsor could range MYR1-2bn.

• Asset enhancement initiatives (AEI) bearing fruit. Sunway Resort Hotel’s refurbishment has led to its average room rate doubling, while Sunway Carnival Mall post-renovation has enjoyed 50% higher retail sales psf. Looking ahead to FY25, near-term earnings growth should be driven by the AEIs for Sunway Carnival Mall’s existing wing (to be completed in 3Q25) and Sunway Pyramid’s Oasis segment which opened on 1 Nov. The latter now records more than double the average rental rate from >100 smaller tenants, compared to its lower-yielding anchor tenant previously. These include a wide variety of options, from the largest Muji in Malaysia to Caudalie Spa.

• Leader in sustainability. Sunway REIT has had a long journey in sustainability, beginning with the establishment of its sustainability working group in 2015. The REIT now has seven of its buildings green-certified (34% of 2023 GFA), and plans to have all its assets certified by 2034. This is to account for the lifespan of its existing equipment, with the REIT only planning to upgrade the equipment when it is due. Other than solar photovoltaic cells and food composting, the REIT also introduced a Green Lease Partnership Programme in 2023, which has since achieved 91% participation among retail tenants and 82% among office tenants. This is designed primarily to raise awareness among its tenants and reduce its Scope 3 emissions.

• We increase FY25-26F earnings by 3% for each year, after raising our rental rate growth assumptions. Our TP includes a 4% ESG premium, based on our in-house methodology. Key downside risks include lower-than-expected occupancy rate and rental reversions, and longer-than-expected delays in acquisitions.

Source: RHB Securities Research - 5 Dec 2024