Thursday, November 28, 2013

Sunway REIT - A totally new Sunway Putra Place (CIMB)

Sunway REIT -
Current RM1.30
Target RM1.37
 A totally new Sunway Putra Place

We believe that Sunway REIT's accelerated refurbishment plans for Sunway Putra Place would result in a more than doubling of its NPI by FY16 due to increased rental and higher occupancy rates.

But we maintain our Neutral call on the stock. We revised downwards our DDM-based target price to RM1.37 after adjusting our cost of equity assumptions. Although Sunway REIT's AEI plans for Sunway Putra Place gives us a more positive vibe on its overall earnings outlook in the longer-run, we believe the current broader market offers investors higher returns as opposed to REITs. Furthermore, the likelihood of higher interest rates next year further dampens the attractiveness of REITs.


What Happened
Sunway REIT's management held an analysts briefing last Friday on its asset enhancement initiatives (AEI) plans for Sunway Putra Place. The briefing was held at Sunway Lagoon Resort Hotel, and was well attended by approximately 30 analysts and fund managers. Sunway REIT said it plans to accelerate its AEI for Sunway Putra Place. This is surprising as previously Sunway REIT said it plans to do the AEI in phases, starting with the mall. However, it now plans to do the AEI for all three components (mall, office and hotel) simultaneously. The total refurbishment cost for Sunway Putra Place would be approximately RM460m and is expected to be completed by early-CY15.

What We Think
We think that the acceleration of the AEI for Sunway Putra Place is positive in the longer run as it would boost NPI significantly for the asset. However, in the near-term, we expect Sunway REIT's NPI for FY14 to be weak as a result of the AEI.

What You Should Do
As with the other REITs, we believe investors should no longer accumulate the stock given the narrowing yield spreads due to rising interest rates. We believe investors should look at other sectors which offer higher capital returns. For exposure to Malaysian property, we suggest investors look at Mah Sing which is currently our top pick for the sector.

Sunway REIT analystsbriefing
Sunway REIT's management held an analysts briefing last Friday on its asset enhancement initiative(AEI) plans for Sunway Putra Place.The briefing was held atSunway Lagoon Resort Hotel, and was well attended by approximately 30 analysts and fund managers. Crystal Teh, the Investor Relations manager,presented the plans for Sunway REIT’s AEI for Sunway Putra Place, while CEO Dato' Jeffrey Ngfielded questions. Key highlights from the briefing are laid out below.

Accelerated refurbishment plan
Sunway REIT plans to accelerate its AEI for Sunway Putra Place, which is a mixture of amall, office andhotel. This is a surprise,as previously, Sunway REIT had said it woulddo the AEI in phases, starting with the mall. However, it now plans to do the AEI for all three components simultaneously. The rationale for Sunway REIT's accelerated AEI is to be able to market Sunway Putra Place as a comprehensive brand new 3-in-1 mixed use asset. Furthermore, completing the AEI for the complex as soon as possible would reduce tenants discomfort with regards to the AEI process, i.e. construction noises, etc.

Total refurbishment cost of RM460m
The total refurbishment cost for Sunway Putra Place would be approximately RM460m and is expected to be completed by early-CY15. Inclusive of the initial acquisition cost of RM522.1m, Sunway REITs total investment in Sunway Putra Place would amount to RM981.3m.The estimated NPI post refurbishment is estimated to be approximately RM70m-80m implying an ROI of 7.5-8.5% and an IRR of 11-12%. This is from a pre-refurbishment NPI of RM26m for Sunway Putra Place for FY13implying a significant growth of 170-208%.The NPI estimate is based on a stabilised year estimate, which is expected to be year 2 (CY16) for the mall and office, and year 3 (CY17) for the hotel.

RM307.2m for Sunway Putra Mall
About 67% of the total refurbishment cost, or RM307.2m would be spent on the AEI for the mall. The major refurbishment of the mall includes a new front facade and the creation of additional NLA of approximately 76k sq ft. Sunway REIT would also improve the internal layout of the mall to increase shopper circulation. The improved mall is expected to fetch higher occupancy and rental rates. The occupancy rate is expected to improve to 95% from 69.8%currently,while rental rates are expected to improve by 50-56% from an average (net of promotional and service charges)of RM4-4.50psf to RM6-7psf.The mall will not have an anchor but will have mini anchors, i.e. tenants with a maximum of 20k sq ft. Sunway REIT is currently in negotiations to secure the tenancies. The mall is targeted to have 40% of its space for fashion, 20% for F&B, while the rest would be allocated for entertainment (cinema, bowling alley) and IT. The newly-refurbished mall would be positioned towards the mid-to upper-level income earners as a lifestyle and urban chic mall, and is targeted to have a mixture of international brands such as H&M, Coach as well as regional brands such as Jaspal and Esprit. Sunway REIT expects to attract a mixture of working professionals, families and tourists to the mall.

Sunway Putra Hotel ADR to rise to RM350
For Sunway Putra Hotel, Sunway REIT would embark on a RM123m major refurbishment to revitalise the hotel. The AEI for the hotel would include the refurbishment of the common public areas such as the reception, the existing atrium, the lift lobby, etc and also the rooms and apartments. Post completion, Sunway REIT expects the occupancy rate for the hotel to improve to 73% from 61.3% currently, while the average daily rate (ADR) is targeted to grow by 85-90% to RM350-370 from RM190 currently. The target is in line with occupancy rates and ADRs of 5-star hotels in Kuala Lumpur over the past 8 years. Sunway Putra Hotel aims to attract higher quality corporate clients.

Rejuvenation exercise for Sunway Putra Tower Sunway REIT will spend approximately RM29m to rejuvenate the office portion of Sunway Putra Place, Sunway Putra Tower. The occupancy rate is expected to improve from 78.1% currently to 90%,while net average rental rate is expected to improve by 21-29% from RM2.40 psf to RM2.90-3.10 psf. The improvements would mainly be in the common areas such as the main lobby, the main and car park lift lobbies, and the restrooms. Sunway REIT aims to increase the tenancies from the private sector to 60%,from 11% currently.

Source/Extract/Excerpts/来源/转贴/摘录: CIMB-Research,
Publish date: 25/11/13

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