Acquiring Purpose-Built Student Accommodations in UK

Sunway Bhd, via its recently established private trust, Sunway Residence (Guernsey) Limited, has signed three Sales & Purchase Agreement on 30 October 2019 to acquire purpose-built student accommodations (PBSA) in Bristol and Sheffield, United Kingdom (UK) for a total purchase consideration of GBP37.6mn (approximately RM202.8mn). The proposed acquisition is expected to be completed by 4Q19.

More about the Assets

The purpose-built student accommodations are located at prime locations in Bristol (2 buildings) and Sheffield (1 building), within walking distance to universities which are members of the Russell Group like University of Bristol and University of Sheffield respectively. In terms of occupancy rates, the 2 student accommodations in Bristol, i.e. Colston Property and Centregate Property are fully-occupied. The Redvers Property, which is located in Sheffield, the 4th largest city in England, is only 47% occupied. However, the vendor of Redvers Property has provided a rental guarantee for the bedspaces of GBP1.9mn for the academic year 2019/2020 which represent an occupancy of 97%. Refer Appendix 1- 3 for more details of the assets.

UK PBSA Market Outlook

According to the latest applications data from the Universities and Colleges Admissions Service (UCAS), more than 560,000 students applied to start a fulltime undergraduate course at UK universities for the 2019/20 academic year. This was nearly 2,500 more applications than at the same point last year. International student numbers increased in spite of the heightened level of political uncertainty surrounding Brexit, suggesting the ongoing global appeal of UK higher education. Meanwhile, Knight Frank, also commented in its latest UK Student Market Update (April Issue) that the medium and long-term outlook for PBSA market remains bright, underpinned by positive demographics and the new International Education Strategy (IES), which was released by the UK government in March. The aim of the IES is to increase international student numbers in the UK by more than 30% to 300,000 by 2030, and generate GBP35bn through education exports.

Our View

According to announcement, the acquisition cost of GBP37.6mn is at a slight discount to the market value of GBP38.1mn as appraised by independent valuer, CBRE Ltd, using the income approach and comparison approach. Based on the acquisition cost of GBP37.6mn and estimated annual rental of GBP3.5mn, the gross yield of these assets would work out to 9.2%. We understand that PBSA in the UK is an attractive investment as it offers an annual net yield of between 4% and 7%.

This proposed acquisition is expected to provide Sunway Group with 1) geographical and sector diversification and 2) a stable and sustainable income stream. Nonetheless, we are neutral on this acquisition given the minimal impact to earnings. Our back-on-the-envelope calculation suggests that the new assets will increase our FY20/21 earnings by about 2%. The group intends to fund the acquisition through bank borrowings. Note that the group financial is solid with healthy net gearing of 0.36x and a cash balance of RM6.4bn.

Impact

We leave our FY19-21 estimates unchanged for now, pending the completion of the acquisition.

Valuation

No change to our target price of RM1.78/share, based on target average blended CY20 PE/PB of 14x/0.9x. With a potential total return of 9.4%, we maintain our Hold recommendation on Sunway.

Source: TA Research - 1 Nov 2019