KUALA LUMPUR (Aug 10): CIMB IB Research has maintained its "hold' rating on Sunway Real Estate Investment Trust (REIT) at RM1.74 with a lower target price of RM1.76 (from RM1.79) and said the REIT has earmarked a RM370 million to RM380 million capital expenditure (capex) for retail and hotel asset enhancements over the next two financial years.

In a report today, CIMB IB Research's Sharizan Rosely said the capex will be ploughed into Sunway Resort Hotel's ballroom and meeting room refurbishments, and Sunway Carnival Mall's (SCM) three-year expansion phase (completion: financial year ending June 30, 2021 (FY21)) costing RM353 million, of which RM27 million piling phase has been incurred.

SCM's enlarged 330,000 sq ft net lettable area (NLA) would increase total group NLA to 830,000 sq ft, he added.

The portfolio of assets rose to 16, with the inclusion of Sunway REIT Industrial Park, Shah Alam, and Sunway Quill Property (SP3), Sharizan said, adding that this increased its total asset value by 8.8% to RM7.3 billion.

He noted that the group targets to maintain blended rental reversion growth in the "mid-single digit" in FY19 to FY20 on the back of weaker leisure demand, interim drop in occupancy for selected office assets, and competition from new malls.

"The group remains cautiously optimistic about the REIT sector outlook," said Sharizan, explaining that the sustainability of the feel-good factor on consumer sentiment post-zero-rated goods and services tax would hinge on the incoming sales and services tax in September.

"The likely higher minimum wage threshold could also impact its hotel segment," he said, adding that the global upward interest rate normalisation cycle could also put pressure on earnings (FY18 average cost of debt: 3.98%).

Modest earnings growth is expected for retail and office assets, despite the oversupplied state, he added.

Full-year net property income (NPI) advanced 8% year-on-year to RM420 million, while NPI margin grew marginally to 75% versus FY17's NPI of 74.4%.

"NPI margin could have been higher if not for the property expenses for Sunway Pyramid and Sunway Carnival," he added.

At 9.57am, Sunway REIT units were one sen or 0.57% lower at RM1.73, valuing it at RM5.1 billion.