Friday, August 9, 2013

Sunway REIT :Potential for more downside if interest rates continue to rise (CS)

Sunway REIT
Maintain NEUTRAL
Price (06 Aug 13 , RM) 1.33
TP (prev. TP RM) 1.40 (1.62
Potential for more downside if interest rates continue to rise

● SunREIT’s FY13 distributable income of RM231 mn, up 14% YoY, were in line with expectations driven by lower finance cost and strong rental reversions at Sunway Pyramid and Sunway Carnival.

● With the suspension of Perunding Ranhill Worley's down-stream license, we believe that the initial hopes of Ranhill Worley Parsons (RWP) taking up the vacant space at Sunway Tower is now less likely to materialise. There is also the risk that RWP could look to vacate some of the space it occupies, although Sunway Tower only makes up 4% of total NPI.


● SunREIT may be close to securing an acquisition which would be a positive catalyst for the stock if it can shore up growth and de-risk the portfolio. 30% of SunREIT's NPI is derived from the office and hospitality segments, which tend to be more volatile.

● Maintain NEUTRAL. We cut our TP to RM1.40 (from RM1.62) mainly due to the higher risk-free rate of 3.8% and have fine tuned our FY14E and 15E earnings by +1% and -1% respectively. SunREIT trades at an FY14E gross yield of 6.3%, however, there could be further downside if interest rates continue to rise.

Distributable income up 14% YoY
SunREIT’s results were within expectations as FY13 distributable income grew 14% YoY to RM231 mn, and made up 100% of consensus’ full-year estimates. The increase was mainly driven by lower finance cost (3.8% in FY13 versus 4.5% in FY12) and strong rental reversions at Sunway Pyramid and Sunway Carnival

Retail
The retail segment’s NPI grew 2.9% YoY, driven by Sunway Pyramid and Sunway Carnival which saw strong rental reversions of 18% and 21% respectively. The main year for rental reversions will be in FY2014 when 53% of Sunway Pyramid and 56% of Sunway Carnival will expire.

Hospitality
The hospitality segment’s NPI fell 4.8%, mainly due to lower occupancy at the Sunway Integrated Resort City hotels and refurbishments at Sunway Hotel Seberang Jaya.

Office
The office segment’s NPI declined 6.5%, mainly due to lower overall occupancy at Sunway Putra Tower and Sunway Tower. The management remains cautious on the office segment with an anticipated oversupply.

Higher office sector risk
With the suspension of Perunding Ranhill Worley's (PRW) down-stream license, we believe that the initial hopes of Ranhill Worley Parsons (RWP) taking up the vacant space at Sunway Tower is now less likely to materialise. [RWP occupies 70% of Sunway Tower and has an exclusive arrangement to be appointed for all projects won by PRW in Malaysia]. There is also the risk that RWP could look to vacate some of the space it occupies, although Sunway Tower only makes up 4% of total NPI.

Target of one acquisition a year
SunREIT has an internal target of one acquisition a year and growing its asset size to RM7.0 bn in the next 5–7 years, from RM5.2 bn currently.

With Putramall set to re-open in 2HFY15, DPU growth is expected to be muted for FY14E. However, SunREIT may be close to securing an acquisition which would be a positive catalyst for the stock if it can shore up growth and de-risk the portfolio. 30% of SunREIT's NPI is derived from the office and hospitality segments which tend to be more volatile.

Maintain NEUTRAL, further downside risk if interest rates continue to rise
Maintain NEUTRAL. We cut our target price to RM1.40 (from RM1.62 previously) mainly due to the higher risk-free rate of 3.8% and have fine tuned our FY14E and 15E earnings by +1% and -1% respectively.

SunREIT trades at an FY14E gross yield of 6.3%, however, there could be further downside if interest rates continue to rise. Our economist expects the overnight policy rate to rise by 50 bp in 2014.



Source/Extract/Excerpts/来源/转贴/摘录: Credit Suisse
Publish date: 07/08/13

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