Not so sunny in 2014
The macroeconomic outlook for REITs is not particularly favourable in 2014 due to a potential rise in interest rates. Furthermore, we believe that Sunway REIT's NPI for FY6/14 and 1HFY6/15 will be negatively affected by its AEI for Sunway Putra Place.
Our DDM-based target price is reduced to RM1.33 after we increased our cost of equity to 9.7% (from 9.6%). Under our revised rating structure, our recommendation changes from Neutral to Hold. We believe that investor sentiment on M-REITs as a whole has waned due to the more positive market outlook. Furthermore, the risk of higher interest rates in 2014 will make the returns on REITs less attractive.
Accelerated AEI for Sunway Putra Place
Sunway REIT is currently undertaking an asset enhancement initiative (AEI) for Sunway Putra Place. The AEI for all three components (mall, office and hotel) will be carried out simultaneously. The refurbishment of Sunway Putra Place will cost approximately RM460m and is slated for completion in early CY15. This is negative for Sunway REIT‘s net property income (NPI) in the short term due to the loss of revenue from Sunway Putra Place. However, on a brighter note, the AEI will boost Sunway Putra Place's NPI by 170-208% from 2016 onwards.
RM307.2m for Sunway Putra Mall
Around 67% of the total RM460m AEI for Sunway Putra Place will be used to revamp Sunway Putra Mall. This includes a new front facade and additional NLA of approximately 76k sq ft. The internal layout of the mall will also be improved to increase shopper circulation. This is expected to increase the occupancy and rental rates for the mall by 50-60% from an average of RM4-4.50 per sq ft to RM6 per sq ft.
No new assets in 2013
Sunway REIT did not inject any assets YTD but management did not rule out the possibility of a last-minute acquisition. Nonetheless, the lack of acquisitions so far implies that FY6/14 earnings are likely to be flattish. This will be exacerbated by the loss of revenue from Sunway Putra Mall due to the AEI. However, we expect Sunway REIT to maintain its annual acquisition target of one asset per year in 2014.
Publish date: 10/12/13