Sunway REIT : Initiating coverage with a BUY call at 96 sen, TP of RM1.15

Sunway REIT — treasures of the pyramid

Sunway REIT
(Sept 21, 95.5 sen)
Initiating coverage with a buy call at 96 sen and target price of RM1.15: Sunway REIT has become the largest in asset size and free float in the Malaysian REIT (M-REIT) sector, offering a sizeable exposure to the relatively more resilient nature of the retail sector. We initiate coverage on SunREIT with a RM1.15 DCF-based target price, a premium to the existing M-REITs, for its size, quality assets, earnings resilience and asset growth potential.

With RM3.73 billion in appraised asset value, SunREIT’s portfolio far outweighs its Malaysian peers’ average of RM914 million and CMMT’s RM2.21 billion. SunREIT has a free float of RM1.16 billion, which is 34% of the sum of the other M-REITs’ free float of RM3.38 billion and 1.6 times CMMT’s free float of RM723 million. With asset size and free float closer to that of the Singapore retail REITs, SunREIT has drawn sizeable foreign interest, holding an estimated 25% of its total paid-up units.

Sunway Pyramid Shopping Mall makes up 61.7% of SunREIT’s asset value, and we estimate that it will contribute 62.8% to gross rental income in FY2011. The 1998/2009 economic downturns, 2003 SARs and 2009 H1N1 outbreaks have seen greater resilience in occupancy rates at the Klang Valley’s suburban shopping centres compared with those in Kuala Lumpur city centre. Rental at the Pyramid Mall has also experienced an uninterrupted uptrend since 2000.

SunREIT’s added appeal lies in its long term growth potential from Bandar Sunway’s expanding integrated resort city development providing a rising residential catchment. There is also a sizeable pipeline of potential asset injection by its sponsor, Sunway City, under a right of first refusal agreement. We estimate RM750 million worth of properties for near-term injection, growing SunREIT’s asset size by 20%. SunREIT’s 30% debt to-asset ratio allows it the capacity to borrow another RM750 million for asset acquisition.

We have used the discounted cash flow method to find SunREIT’s intrinsic value and derived RM3.08 billion in equity value, the basis for our target price. This implies FY2011 dividend yield of 5.8% and cap rate of 6%. As a sector leader in M-REITs on several fronts, SunREIT’s premium valuation over the other M-REITs is well justified. Listed industry leaders usually command a premium over their peers. — Maybank IB Research, Sept 21


This article appeared in The Edge Financial Daily, September 22, 2010.