Sunway REIT (SREIT MK, NEUTRAL, FV: RM1.25, Close: RM1.21)

Stock Name: SUNREIT
Company Name: SUNWAY REAL ESTATE INVT TRUST

Research House: OSK

Price Call: HOLD

Target Price: 1.25

Due to resource allocation on our part, our coverage onSunway REIT was put on hold in early 2011. We are now reinitiating coveragewith a NEUTRAL recommendation, at a FV of RM1.25, based on a target yield of5.7% on CY12 DPU. This target yield is based on the average current yield ofits two closest peers in term of assets value and market cap, namely PavilionREIT and Capitalmalls Malaysia.  We thinkthe impending makeover of Sunway Putra  Mall (SPM) and potentiallyyield accretive acquisitions as well as proactive capital management initiativeswill support the REIT's future upside.

Briefly on the REIT.Sunway REIT is a real estate investment trust formed to own and invest in adiverse portfolio of income-generating real estate assets in Malaysia. It was listedon the Bursa Malaysia Main Market on 8 July 2010. In April 2011, the REIT made itsmaiden acquisition when it bought (by public auction) a mixed development knownas Putra Place comprising  Putra Mall(retail), Putra Tower (office) and Putra Hotel (hospitality), for a total cashconsideration of about RM513.9m. With 11 assets in its stable worth about RM4.379bn presently, Sunway REIT is thelargest REIT in Malaysia (M-REIT) in terms of asset value, with an estimatedfree float of 63%. 

Acquisition potentialfrom blue-chip sponsor. Sunway REIT has right of first refusal with respectto any properties to be disposed of by its sponsor, Sunway Bhd. The REIT isexpected to benefit from its close relationship the widely  recognized sponsor,which has a large and diversified portfolio of properties as well as anextensive development project pipeline. This clearly complements the REIT'sacquisition growth catalyst should its sponsor dispose of properties that meetthe trust's investment criteria. Backed by its huge assets base, the REIT caneasily borrow sizeable amounts for its  acquisitions before hittingthe statutory limit of 50%. With this being its greatest certainly, the REIT iscomfortably positioned to sustain its yield-accretive asset growth strategy.

Reinitiate withNeutral; FV RM1.25. We reinitiate  coverage on SunwayREIT with  a NEUTRAL recommendation,  at an  FV of RM1.25, based on atarget yield of 5.7% on CY12 DPU. This yield target is based on the average current yield of its two closest peers interms of asset value and market cap, namely Pavilion REIT and Capitalmalls Malaysia(CMMT), which  are currently trading atCY12 yields of 5.26% and 6.17% respectively. We think the successfultransformation of Sunway Putra Mall (SPM) and its future yield accretiveacquisitions will provide the future potential for the REIT, bolstered by itsproactive capital management initiatives.

Source: OSK188