Target Price: MYR1.52
Focusing On Organic Growth
SREIT’s FY13 earnings were boosted by proactive capital management and contributions from new assets. Going forward, it is likely to focus on organic growth and allocate MYR500m as refurbishment capex over the next two to three years. That said, despite the robust growth prospects, the rise in bond yields is likely to pressure sector valuations. Maintain NEUTRAL.
- Strong results overall. Sunway REIT (SREIT)’s 4QFY13 core net profit of MYR55.5m (+15.4% y-o-y; flat q-o-q) brought its total FY13 earnings to MYR218.8m (+14.8% y-o-y). Earnings were boosted by the strong performance of its retail assets, new contribution from Sunway Medical Centre (acquired in Dec 2012)
as well as the interest savings arising from the REIT’s active capital management initiatives. This softened the impact of Sunway Putra Mall (SPM)’s closure from April 2013 onwards as well as the lower contributions from the office and hospitality segments. SREIT recorded an average portfolio rental rate growth of 18.7% (over a three-year period) for the 717k sq ft of net lettable area (NLA) renewed. The total distribution per unit (DPU) for FY13 is 8.3 sen (+10.7% y-o-y), translating into a decent net yield of 5.6% as of yesterday’s closing price.
- Briefing highlights. Management has guided for capex totaling MYR500m for asset refurbishments over the next two to three years. The bulk of this will be spent on the major overhaul of Sunway Putra Place (SPM, Sunway Putra Tower and Sunway Putra Hotel), due for completion in FY15. Despite SPM’s closure during the construction period, SREIT is confident that the growth in its other assets will help to sustain DPU growth. In the current refurbishment of Oasis Boulevard 5 in Sunway Pyramid, SREIT is creating 20k sq ft of new NLA and reconfiguring 23k sq ft of the existing NLA. The indicative ROI for these exercises are in the high single digits. The REIT is also managing its capital prudently, with 80% of its debt now on fixed rates (3QFY13: 56%) to hedge itself against the rising bond yield environment.
- Still NEUTRAL. We introduce our FY15 numbers as we roll over our financial period. Maintain NEUTRAL call and MYR1.52 FV on the counter. Note that rising bond yields will continue to exert downward pressure on valuations in the REIT sector.
Publish date: 07/08/13