Sunway REIT (Maybank IB Research) maintain buy; target price RM1.15

Buys Putra Place at a discounted price

Maiden acquisition post-listing. SunREIT has confirmed the purchase of RM514m Putra Place (PP). Despite the discounted purchase price and potential enhancement opportunities offered by PP, we are neutral on the deal given our concerns on the office market, huge capex and considerable timeline required before PP contributes significantly. No change is made to our earnings forecasts and RM1.15 target price pending further details from the management.

Buys Putra Place. SunREIT has successfully acquired PP at a public auction on 30 Mar ’11 for RM514m cash, 11% discount to the RM576m market value. PP, auctioned by CIMB, is a mixed-use development comprising a shopping mall, hotel and office. It is strategically located opposite the Putra World Trade Centre (PWTC) and is easily accessible via major highways and well served by public transportation such as the STAR Light Rail Transit (LRT) and KTM Commuter Train (see figure 1). The acquisition is expected to be completed by Aug ’11.

Neutral on the deal. Whilst we are positive on the reasonable pricing, potential enhancement and turnaround opportunities offered by PP, our concerns remain on PP’s office component (c.300,000 sq.ft.) as the office market is currently under pressure, given the huge incoming supply of 13m sq.ft. from 2011-2013 (from 59m sq.ft. in 2010). Moreover, considerable capex and time may be required to revamp/transform the more than 20 years old property before it can contribute significantly to SunREIT.

A yield accretive acquisition? The management is silent on the details before the acquisition completes but it has hinted that this will be a “yield accretive” acquisition. From our ground checks and own assumptions, we believe PP would likely provide a property yield of 8.7% (see Table 1), before considering refurbishment or further capex costs.

The potential yield could taper by 1.3% for every RM100m of refurbishment costs. SunREIT’s existing trading yield meanwhile is 6.5% and effective interest rate is c.5%. Post-acquisition, SunREIT’s gearing ratio is expected to rise to 0.36x, from 0.27x as at Dec ’10. SunREIT’s total asset value will increase by 14% to RM4.3b post-acquisition.