Sunway REITSunway Real Estate Investment Trust (Aug 17, RM1.50)

Maintain neutral with an unchanged target price (TP) of RM1.64: We recently visited Sunway Real Estate Investment Trust’s (Sunway REIT) Sunway Putra Mall in Kuala Lumpur, which was reopened to the public back in May. The newly refurbished mall is a stark contrast to its previous condition and above our expectations.

We think the mall will do well in the future, given the potential catchment surrounding the area, good accessibility and interesting tenant mix. Sunway Putra Hotel to be fully operational by the end of this year is currently facing low occupancy (about 20%) due to the ongoing refurbishment of the hotel rooms and slow hospitality demand.

That said, we think that the hotel will be able to attract more customers once it is fully reopened, as we find the ambience and facilities similar to that of Sunway REIT’s Sunway Resort Hotel and Spa in Bandar Sunway, Selangor, and the room rates are reasonable.

The office segment will remain challenging for Sunway REIT, with Ranhill WorleyParsons Sdn Bhd and Suruhanjaya Koperasi Malaysia leaving Sunway Tower and Sunway Putra Mall this year. Although there are prospective tenants, we think the upcoming rental rate for new tenants will likely bring down the average rate of Sunway Tower. Nevertheless, filling in the vacancy is more important in our opinion.

We maintain our earnings forecasts and reiterate our “neutral” recommendation, with a dividend discount model-based TP of RM1.64 (8.6% upside). Given the potential revenue that can be unlocked from the full opening of Sunway Putra Place, the steady rental growth from Sunway Pyramid and potential pipeline asset injections, we think that investors should maintain their exposure to the REIT. With a dividend yield of 6.4% to 6.7%, Sunway REIT provides defensive exposure, especially during the current challenging equity market conditions. — RHB Research Institute, Aug 17

This article first appeared in the digitaledge Daily on Aug 18, 2015. Subscribe here.

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