SunREIT should fare well

InsiderAsia expects Sunway Real Estate Investment Trust (SunREIT) to fare relatively well upon its debut on the Main Market of Bursa Malaysia on Thursday, July 8.

With an initial investment of properties worth nearly RM3.73 billion, it will be the largest listed REIT on the local bourse with units in circulation totalling 2.68 billion. Its size and liquidity should place it on the radar screens of most investors, including local and foreign institutional funds.

Attractive to low-risk, high-yield seekers
The timing of the listing favours SunREIT. Confidence in the equity market, following the strong rally that started in March 2009, has been tempered by recent events.

Whilst the global economy rebounded strongly in 4Q09-1Q10, the pace of growth is widely expected to taper off going into 2H10. Fallout from the sovereign debt crisis and resulting fiscal tightening across Europe is likely to start filtering through over the next couple of months. At the same time, the temporary boost from government spending under massive stimulus packages, inventory rebalancing and pent-up demand from the height of the credit crisis are expected to fade.

Given the somewhat uncertain outlook, at least in the near to medium term, many investors are switching to less risky assets. This will enhance the appeal for high-yielding REITs, which track less the volatile equity market and more the steadier property market.

Initial assets valued at RM3.729 billion
SunREIT will have an initial investment in eight properties, valued at RM3.729 billion. The largest chunk of its assets, about 70%, will be retail-based, comprising the Sunway Pyramid Shopping Mall, Sunway Carnival Shopping Mall and SunCity Ipoh Hypermarket.

Hospitality — Sunway Pyramid Hotel & Spa, Pyramid Tower Hotel and Sunway Hotel Seberang Jaya — accounts for another 22% of total assets while the remainder is made up of office properties.

Looking at new acquisitions
SunREIT expects to grow and possibly double its assets within the next five to seven years, with a focus on the retail and hospitality sectors. With an initial gearing estimated at about 35%, it would be able to leverage further to fund new acquisitions.

Some RM2.6 billion worth of properties have already been identified for potential acquisition, primarily from Sunway City, one of the largest property developers in the country, although it is also open to acquisitions from third parties. Sunway City, which will retain a 38% stake in SunREIT immediately after the initial public offering (IPO), has granted the trust a right of first refusal on its properties.

Upbeat on organic growth
Apart from fresh acquisitions, SunREIT is also upbeat on the organic growth potential of its existing properties.

Roughly 85.5% of its assets, in terms of value, are located in Bandar Sunway, an 800-acre integrated resort and township in the Klang Valley, where development is still ongoing.

Some of the new projects that have been announced include the Sunway South Quay, a middle-upper market residential-commercial project with gross development value estimated at RM5.2 billion, two commercial and office buildings as well as student residential accommodation adjacent to the Monash University Sunway campus.

Monash University as well as the other two education institutions — Sunway International School and Sunway University College — have also unveiled expansion plans. If all goes well, student population is estimated to increase to almost 19,000 from the current 13,551 over the next three years.

The township is also angling for higher tourist patronage, including medical tourists to the Sunway Medical Centre. The Sunway Lagoon is one of the most popular theme parks in the country, with some 900,000 visitors per year, on average, between 2000 and 2009.

The expected population and foot traffic increases will underpin revenue growth for the four SunREIT properties — Sunway Pyramid Shopping Mall, Sunway Pyramid Hotel & Spa, Pyramid Tower Hotel and Menara Sunway. Collectively, they accounted for about 87% of revenue in 2009.

Rental rates at the Sunway Pyramid Shopping Mall have been rising steadily — from about RM7 per sq ft per month in 2006 to RM9 in 2009 — despite increasing competition. SunREIT is confident of further upward revisions to rental rates with the majority of tenancies expiring in 2H10 and 2011.

Net profit in FY11 should exceed IPO forecasts
SunREIT forecasts revenue and distributable income of RM329.5 million and RM180.2 million respectively for the financial year ending June 2011.

The estimates appear fairly conservative. By comparison, revenue for the first eight months ended February 2010 totalled RM281.8 million. If we were to annualise this figure and adjust for seasonal fluctuations, revenue for FY10 would probably come in at around RM400 million to 420 million — well above the forecast of RM329.5 million for FY11.

Total distribution to unitholders is estimated at 6.7 sen for FY11. That will translate into gross yield of 7.5% based on the institutional IPO price of 90 sen per unit. SunREIT has committed to distributing all of its net profit in the first two years of listing and a minimum of 90% of annual profits thereafter.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.- InsiderAsia

This article appeared in The Edge Financial Daily, July 6, 2010.