SUNREIT is acquiring a retail mall in Kluang, Johor, for RM158m. The acquisition is earnings and valuation accretive at a 6.8% yield. We believe SUNREIT will give its competitors in the fairly saturated market a run for their money by enhancing the tenant mix and shopping experience at the mall. We raise our FY25F earnings forecast by 2%, lift our TP by 2% as well to RM1.69 (from RM1.65) but maintain our MARKET PERFORM call.

SUNREIT is acquiring a retail mall known as “Kluang Mall” (see Exhibit 1) in Kluang, Johor, for RM158m. In operation since 2008, Kluang Mall is located within the town area with a net lettable area of 360k sq. ft. It is currently 99% occupied with over 130 tenants anchored by Pacific Hypermarket and Pacific Departmental Store. Other key tenants include familiar names such as Brands Outlet, H&M, Uniqlo, Popular Bookstore, Texas Chicken and KFC.

At a net property income yield (NPI) of 6.8% (or RM10.7m per year), the valuation is consistent with recent acquisitions including 163 Retail Park (at 6.5%). The acquisition is earnings accretive given SUNREIT’s funding cost is estimated at 4.5% and valuation accretive as the NPI comes above our target yield for SUNREIT of 6.5%.

The acquisition will increase SUNREIT’s gearing of 0.38x as at end-Mar 2024 to 0.39x that is still highly manageable.

The retail mall market in Kluang is fairly saturated with the presence of Kluang Parade (anchored by Parkson), AEON BiG Kluang and Econsave Kluang, and the imminent entry of Lotus’s. As the new owner of Kluang Mall, we believe SUNREIT will give its competitors in the market a run for their money by enhancing the tenant mix and shopping experience at the mall, leveraging on SUNREIT’s vast experience in running malls both in major cities as well as smaller towns in Malaysia.

Forecasts. We raise our FY25F earnings forecast by 2%.

Valuations. Correspondingly, we lift our TP by 2% as well to RM1.69 (from RM1.65) based on a revised FY25F NDPU of 9.3 sen(from 9.1 sen) against an unchanged target yield of 6.5% (derived from a 2.5% yield spread above our 10-year MGS assumption of 4.0%). The low yield spread reflects SUNREIT’s diversified asset portfolio in key urban regions. We reckon that the group’s brand equity also benefits greatly from its affiliation to the Sunway conglomerate. There is no adjustment to our TP based on ESG of given a 3-star rating as appraised by us (see Page 4). Maintain MARKET PERFORM as its current share price has fairly reflected its fundamentals.

Risks to our call include: (i) bond yield expansion, (ii) lower-than- N expected rental reversions, and (iii) lower-than-expected occupancy B rates. C P N N

Source: Kenanga Research - 12 Aug 2024