Sunway REIT - Proposed acquisition of Sungei Way industrial property

Date: 
2022-06-24
Firm: 
AmInvest
Stock: 
Price Target: 
1.76
Price Call: 
BUY
Last Price: 
1.53
Upside/Downside: 
+0.23 (15.03%)
  • Acquisition of industrial land with building erected. Sunway REIT (SREIT) entered into a sale and purchase agreement to acquire 2 contiguous parcels of land, together with existing buildings erected thereon in Sungei Way, Petaling Jaya, Selangor, for RM60mil cash (Exhibit 1).
  • Easily accessible location. Situated in Sungei Way Free Trade Industrial Zone, Petaling Jaya (Exhibit 2), the property is easily accessible via major roads and expressways such as Federal Highway and Lebuhraya Damansara-Puchong.
  • Likely to be the former manufacturing site of Western Digital. The property's specifics have not yet been revealed. However, we believe it is the likely to be previously occupied by Western Digital (WD) given that the property type, land area, and gross floor area of the aforementioned properties are identical to those of WD’s previous hard disk drive manufacturing facility site in Sungei Way Free Trade Industrial Zone (Exhibit 3).
  • 2nd industrial property acquisition to expanding industrial portfolio. The Sungei Way industrial property will be SREIT’s second industrial property following the acquisition of Sunway REIT Industrial - Shah Alam 1 on August 2017. This is in line with SREIT’s strategic direction to expand its asset portfolio in the industrial segment.
  • Acquisition to be fully funded by debt. The proposed acquisition will be fully financed by SREIT’s existing debt programme. Upon completion of the proposed acquisition, its gearing ratio is expected to rise to 37.6% from 37.2% as at 31 March 2022, which is still well below the statutory threshold of 60%.
  • Slight increase to the REIT’s property value. The proposed acquisition is expected to be completed in 2HFY22. Upon completion of the proposed acquisition, SREIT’s property value will increase 1.1% to RM9bil. This will raise the portion of its industrial property of the total property value from 1.1% to 1.8%.
  • Minimal contribution to distributable income. The contribution from the industrial property in Sungei Way is anticipated to be minimal given as it would account for only 0.7% of total property value of SREIT. We raise our FY23F/ FY24F distributable income estimate by 0.8%, assuming rental yield at 8.3% and cost of debt 4%.
  • We maintain our BUY recommendation with an unchanged fair value of RM1.76/unit based on our Dividend Discount Model valuation with a WACC of 7.7% and terminal growth rate of 2.5%.

Source: AmInvest Research - 24 Jun 2022

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