15 May 2012
We are initiating on coverage on Sunway REIT (SunREIT) with an OUTPERFORM recommendation and TP of RM1.39 based on GGM (8.1% required rate of return, 3.0% terminal growth, FY13E NDPU of 7.1 sen). SunREIT is positioned as a township REIT with emphasis on retail assets and predominantly capitalising on the value enhancement play of Sunway Integrated Resort City (SIRC). It is also the largest M-REIT in total asset size. SunREIT has the most visible pipeline among its retail peers as its parent and sponsor, Sunway Bhd, has a large pipeline of assets. SunREIT has lined up RM3.0b worth of acquisitions over the next 3-5 years, which will eventually swell its total asset value by 68% to RM7.4b. Its large asset base enables sizeable fund raising opportunities, allowing for more meaningful acquisitions. We like M-REITs with strong acquisition growth stories because of potential NAV enhancements and growth in absolute dividends. We estimate SunREIT’s FY12-13E gross yields at 5.8%-6.4%, which is on par with the average of its peers, the other large retail M-REITs.
Largest township M-REIT by total asset size. SunREIT’s current total asset is worth RM4.4b. It is the second largest M-REIT with a market capitalisation of RM3.3b. It offers a unique value proposition of tapping into SIRC’s township growth story, particularly when the township is at a maturing stage. Hence, SunREIT’s SIRC assets enjoy natural advantages like strong footfalls/traffic, which bodes well for its retail, office and hotels.
Big asset base allows for sizeable fund raising opportunities. We reckon up to RM645.0m new funds can be raised based on a 20% placement, which could be used to pare down its debt. Subsequently, the group can borrow up to RM598.0m to finance new acquisitions, based on a comfortable gearing ceiling of 35%, which will result in NAV accretion and absolute dividends growth.
The largest visible acquisition pipeline among retail M-REITs. SunREIT’s total asset value will swell up by 68% to RM7.4b within the next 3-5 years as it is eyeing up to RM3.0b worth of SIRC assets acquisitions from its parent (e.g. Sunway University, Sunway Giza Shopping Mall, Sunway Medical Centre, etc). It enjoys the first right of refusal to acquire its parent’s properties. Other advantages are that SIRC assets would likely fit SunREIT’s investment criteria. We feel that this acquisition growth strategy is akin to that of the highly successful Axis REIT (OP; TP: RM2.82), which is the most active office/industrial M-REIT in terms of acquisitions, allowing it the highest and yet sustainable, comparable peers Fwd PBV valuations of 1.2x vs. SunREIT’s 1.2x.
Strong organic growth play. Sunway Pyramid is up for major rental reversions (62.5% of NLA). Additionally, the group is embarking on a major refurbishment of the mall portion of its recently acquired Sunway Putra Place. Post refurbishments in 3QCY14, the proportion of the group’s NPI contributions from SPP mall should increase from 7% to 8%.
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