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Sunway Real Estate Investment Trust (Sunway REIT)
(Nov 7, RM1.51)
Maintain “buy” with a higher target price (TP) of RM1.60:
Revenue grew 13.6% year-on-year (y-o-y), driven by Sunway Pyramid mall (up 14.6% y-o-y) following a 11% rental reversion achieved on over 64% of net lettable area (NLA) that expired last year. Sunway Carnival mall rents also performed (up 24% y-o-y) with 99.5% occupancy (from 91%) after securing a new mini-anchor.

This included a reversal of earlier over-provision for assessment charges of RM1.5 million. But even if we exclude the reversal, the margin was still firm at 75% (financial year 2014 [FY14]: 75%).

Overall, net earnings grew 14.5% y-o-y, making up 26% of our full-year forecast. The 2.3 sen distribution per unit (DPU) implies a 99% payout.

It was disclosed that anchor tenants at Sunway Tower and Sunway Putra Tower were moving out by end-2014, which would reduce occupancies to 50% and 30% respectively. The management is actively seeking replacement tenants.

We adjusted our earnings to account for this, but as these two assets account for less than 5% of net property income, we are not concerned about group DPU. We also adjusted borrowing costs following the rate hikes, but the larger (73%) share of fixed-cost borrowings is a relief.

The RM459 million refurbishment works at Sunway Putra Place’s mixed retail, office and hotel asset are slated for completion mid-2015. The resumption of contribution, especially from the retail mall reopening (likely in the fourth quarter of financial year 2015 [4QFY15]), is expected to boost earnings significantly and drive double-digit earnings growth in FY16.

We raised the TP to RM1.60 after switching to the dividend discount model valuation methodology. The assumptions are 8% cost of equity and 1.75% terminal growth. The revised TP implies a decent 5.5% forward yield and is supported by a strong DPU growth from FY16 onwards. — Alliance DBS Research, Nov 7

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This article first appeared in The Edge Financial Daily, on November 10, 2014.

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