01 April 2011 | Initiating Coverage

Sunway Real Estate Investment Trust Recommend NEUTRAL

Retail focused REIT Target Price (TP): RM1.14

INVESTMENT HIGHLIGHTS

• Largest in Malaysia: Sunway Real Estate Investment Trust RETURN STATS

(SUNREIT) is the largest REIT in Malaysia with RM3.7b worth of
Price (31 Mar 2011) RM1.06
investment properties and market capital of RM2.8b. Free float of
RM1b (36%) is also the highest among all M-REITS. Institutional Target Price RM1.14
investors hold 58% shareholding of SUNREIT, individual investors
Expected Share Price
hold 5% and the rest hold by the sponsor and manager i.e. Sunway +8.0%
Return
City Berhad. Foreign shareholding stands at 26% as at end Feb Expected Dividend Yield +6.5%
2011. Government of Singapore Investment Pt Ltd holds
approximately 10% with its direct holding and indirect interest via Expected Total Return +14.5%

Sunway City Berhad. Substantial stake of the Singapore fund will be

an anchor of stability and confidence for investors. STOCK INFO
• Retail focuses REITS: SUNREIT comprises of 8 properties, each KLCI 1545.13
located at prime locality of Subang, Ipoh, KL and Seberang Jaya
Penang. 67% of total gross floor area of assets is retail space Bursa / Bloomberg 5176/ SREIT MK
(Sunway Pyramid Shopping Mall, Sunway Carnival Shopping Mall
and SunCity Ipoh Hypermarket), 19.4% are hospitality asset Board / Sector Main/ REIT
(Sunway Resort Hotel & Spa, Pyramid Tower Hotel and Sunway
Syariah Compliant Yes
Hotel Seberang Jaya) and 13.6% are office properties (the Sunway
Tower and Menara Sunway). Total value of its retail assets are Issued shares (mil) 2682.35
RM2.6b which is much higher than other retail focus REIT such as
Par Value (RM) 1.00
Capital Mall Malaysia Trust (RM2.1b) and Hektar (RM720m). As at
end 1HFY11, SUNREIT derive 72% of rental income from retail Market cap. (RM’m) 2843.29
asset. The retail properties consist of a diverse tenant mix.
Price over NA 1.07x
Diversified tenants will reduce their exposure to homogenous
tenants with similar economic cycle. 52-wk price Range RM0.88–RM1.09

• First right refusal on sponsor’s property: SUNREIT aims to Beta (against KLCI) N/A
double its asset value to exceed RM7 billion in 5-7 years. The target
is attainable as SUNREIT was granted the first right refusal on 3-mth Avg Daily Vol 1.60m

Sunway City Berhad properties. Their future pipeline properties 3-mth Avg Daily Value RM1.66m
include Sunway Velocity Shopping Mall, Sunway Giza Shopping
Mall, Sunway Medical Centre, Sunway University as well as Monash Major Shareholders

University, Sunway Campus. Combined NLA for Velocity and Giza Sunway City Berhad 36.70%
shopping mall are 900K sq ft and GFA of 3 other assets are 2.2mn EPF 8.07%
rd
sq ft. Apart from the pipeline assets; they could also look for 3
party asset which fit into their portfolio strategies. These properties
would have to be yield accretive, retail & mixed use and located in
fast growing locality.

KINDLY REFER TO THE LAST PAGE OF THIS PUBLICATION FOR IMPORTANT DISCLOSURES















































 


• Rental guarantee: Hospitality segment is subject to economic cycle and stiff competition. SUNREIT mitigate
potential fluctuation in earnings of hospitality assets by engaging in two separate Hotel Master Lease
agreements with subsidiaries of Sunway City Berhad (the Sponsor). Assuming that hotel income falls below
rental guarantee, SUNREIT will be compensated. Combine rental guarantee for all 3 hotels i.e. Sunway
Resort Hotel and Spa, Pyramid Tower Hotel and Sunway Hotel Seberang Jaya are RM 46.5m p.a. for FY11
and FY12 as well as RM35m p.a. for FY13 to FY20. The rental guarantee will last for 10 years.
• Distribution: SUNREIT plan to distribute 100% of the distributable income for the first 2 years and at least
90% in the subsequent financial years. As such we are expecting net distribution yield of 6.4% in FY2011

INVESTMENT STATISTICS
FY June FY11 FY12 FY13

 
 
  

  
  
 


  
  
 

 



  
 


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Source: Company, Forecasts by MIDFR

PROPERTY PORTFOLIO

Sunway Pyramid Sunway Carnival Sunway City

Properties Menara Sunway Sunway Tower
Shopping mall Shopping Mall Hypermarket

Categories Shopping mall Shopping Mall Hypermarket Office Office

Tenancies 715 148 1 36 11

Carparks 3,954 1,104 400 688 293

GFA(sq ft) 4,276,945 983,100 193,408 654,783 456,604

NLA(sq ft) 1,685,568 484,364 181,216 268,978 268,412

Appraised Value
2,300 250 50 138 185
(RM 'mn)

Sunway Resort Pyramid Tower Sunway Hotel

Properties
Hotel and Spa Hotel Seberang Jaya

Categories 5 star hotel 4 star hotel 4 star hotel

Guess rooms 439 549 202

Carparks 649 533 64

GFA(sq ft) 1,050,497 356,888 174,800

Appraised Value (RM 'mn) 480 270 56

Source: MIDF research, Sunway REIT

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• Prime locality of assets ensures sustainable growth: 86% of SUNREIT asset value or 4 of its total 8
investment properties are located at the 800 acres Bandar Sunway. In 1HFY11, SUNREIT derived 84.5% of
its rental income from properties located at Sunway City. Hence, growth potential of SUNREIT is highly
correlated with future development of Bandar Sunway. Bandar Sunway as an integrated township sits on a
1.55 mn major population catchment area covering Subang Jaya, Petaling Jaya, Shah Alam and Puchong.
Positive synergies of commercial, hospitality, leisure, medical, convention (MICE), educational facilities, and
new properties development will elevate the economic activities within the township, thus generating massive
potential upside for properties rental, occupancies and valuation. Over the next 3 years, new visitation to
Sunway Integrated Resort City is expected to increase by 10% from current annual visitation of 30m. Strong
growth in visitation primarily driven by:

o The Pinnacle: A new grade A office building with potential of attracting 5000 new office staff once
complete in 2013. The office building comes with 1,000 new car parks that link to Sunway Pyramid,
Sunway Tower, and Sunway Hotels.
o New Wing of Sunway Pyramid: 50,000 sq ft of retail space will be added to Sunway Pyramid massive
retail space of 1.69m sq ft. Additional 1,000 new carpark link to Sunway Pyramid, Sunway Tower,
and Sunway Hotels will raise carpark space by 25%. A service apartment attached to the new wing
will be developed. 200 units of service apartment is expected to house 1000 new residents.
o Expansion and upgrade of Sunway and Monash University: Both University expansion plan is
expected to raise number of students by additional 5,000
o Sunway South Quay: Sunway South Quay is over 160 acres of residential and commercial land next
to Sunway Lagoon Resort. The development comprises of luxury villas, condominiums, apartments,
commercial and retail development. Total GDV for the development is RM5.2b. There will be
potentially 4000 units new residential units accommodating 20,000 new residents with high spending
power.

• Positive rental reversion had translated into strong earnings growth: Net rental income and net profit
increase by 13.8%qoq and 16.3%qoq to RM62.8m and RM44.7m respectively in 2QFY11. Strong rental
income and earnings growth primarily driven by positive rental reversion of 16.2%. SUNREIT gearing level as
at end 1HFY11 stands at 31%. Under SC guideline, REITS gearing level shall not exceed 50% of asset value.
Thus, for future acquisition SUNREIT could raise up to maximum RM719m through debt financing.

TENANCY RENEWAL PROFILE

NLA renewed as
Number of new NLA due for Total increase for
NLA renewed % of NLA due for
tenancies/renewal renewal in FY11 3 years
renewal in FY11

Sunway Pyramid 330 1,024,961 1,107,958 92.5% 17.1%

Sunway Carnival 28 161,312 234,076 68.9% 2.2%

Menara Sunway 1 26,516 220,676 12.0% 17.6%

Sunway Tower 1 9,937 9,937 100.0% 5.0%

Total portfolio 360 1,222,726 1,572,647 77.7% 16.2%

• Proven track record of asset: Over the past 3 years SUNREIT had registered consistent rental and
occupancies growth. Sunway Pyramid occupancy improved significantly from 92.3% in FY08 to 99.3% in
FY10. Average monthly rental also improved from RM8.41psf to RM8.99psf. IN 1HFY11 occupancies drop
slightly mainly due to tenant’s renovation. Hospitality properties have experience a drop in occupancy rate in
FY09-Y10 due to economic downturn. However in 1HFY10, occupancies and average room rate improved
significantly. Menara Sunway Occupancies was relatively stable as majority of tenants are Sunway Group and
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related companies. Sunway Tower occupancies and rental improved significantly as at end 1HFY11 following
the extensive refurbishment exercise completed in July CY09.

AVERAGE RENTALS
Year ended June

FY08 FY09 FY10 1HFY11

Avg Avg Avg Avg
monthly Occ (%) monthly Occ (%) monthly Occ (%) monthly Occ (%)

rental rental rental rental



 





*+  , 8.41 92.3 8.79 97.9 8.99 99.3 9.39 98.1

*+ - 3.17 86.8 3.66 91.8 3.82 93.6 3.73 92.8

*+ - 
1.74 100 1.87 100 1.87 100 1.87 100
. $,/



 





2.79 94 3.22 97.3 3.29 97.7 3.31 99.5

0*+ 

*+ 1+ 3.35 70.1 3.48 67.1 4.33 94.1 4.4 97




 
Avg daily Avg daily Avg daily Avg daily
Occ (%) Occ (%) Occ (%) Occ (%)


 rate rate rate rate

*+ 
.2
384 78 409 61 397 66.1 430 71.2
*$

 ,1+. 223 82.1 246 78.8 254 79.2 265 83.1

*+ .*)
152 81.2 153 78.8 158 76.7 159 79.2
3 
Occ= occupancies rate

• Strong branding and management: Suncity REIT Management Sdn Bhd, a subsidiary f Sunway City
Berhad is the REIT manager of SUNREIT. Thus, we are confidence on management team as majority has
years of experience in the sector. Apart from strong management team, Sunway established branding in
Malaysia would ensure strong bargaining power as well as pull factor towards attracting quality tenants to its
retail properties i.e. Sunway Pyramid and Sunway Carnival Mall.

• Valuation: We are recommending NEUTRAL with target price of RM1.14 based on dividend discount model.
SUNREIT is currently trading at P/NAV of 1.07, which is slight premium over average P/NAV of 1.0 for M-
REITS. Based on our estimation and management guidance distribution yield of SUNREIT for FY11 will be
6.5%, which is significantly lower than industry average of 8.2%. Investor buying into M-REITS would have to
consider tradeoff of higher distribution yield of other M-REITS against higher free float and defensive earnings
of SUNREIT. 

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PEER COMPARISONS
Current Distribution
NAV EPS DPU
Last Market Shares yield
REIT Per P/NAV
Price Capital Oustanding
Share
(RM mn) FY10 FY11 FY10 FY11 FY10 FY11

SUNWAY 1.06 2,790 2,682.3 0.97 1.09 N/A 6.70 N/A 6.70 N/A 6.32

CAPITAMALLS
1.08 1,629 1,494.9 0.96 1.13 N/A 7.30 N/A 7.60 N/A 6.76
MALAYSIA TRUST

STARHILL 0.88 1,014 1,178.9 1.16 0.76 2.64 10.00 6.49 10.00 7.37 11.36

AXIS 2.33 883 375.9 2.01 1.16 16.06 19.00 16.11 20.10 6.91 8.63

AL-HADHARAH
1.43 797 557.0 1.42 1.00 12.17 12.00 10.00 12.00 6.99 8.39
BOUSTEAD

AL-'AQAR KPJ 1.17 679 580.2 1.07 1.09 7.64 9.00 7.45 9.00 6.37 7.69

UOA 1.35 571 422.9 0.88 1.53 10.17 11.00 9.97 11.00 7.39 8.15

AMANAHRAYA 0.94 533 573.2 0.97 0.96 7.90 7.80 7.50 7.70 8.02 8.24

AMFIRST 1.16 493 429.0 1.38 0.84 9.77 9.00 9.75 8.00 8.41 6.90

HEKTAR 1.30 413 320.0 1.32 0.99 11.93 12.80 10.30 11.40 7.92 8.77

QUILL CAPITA T 1.04 402 390.1 1.28 0.81 8.35 9.10 8.03 8.20 7.72 7.88

TOWER 1.18 331 280.5 1.68 0.70 8.63 11.00 8.60 11.00 7.29 9.32

ATRIUM 1.05 127 121.8 1.05 1.00 10.61 9.00 9.50 8.00 9.05 7.62

Average 820 1.24 1.01 9.62 10.28 9.43 9.92 7.59 8.10

DAILY PRICE CHART

Zulkifli Hamzah
Sean Liong Cheng Fatt
Sean.Liong@midf.com.my
03-2173 8227

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MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS

STOCK RECOMMENDATIONS

BUY Total return is expected to be >15% over the next 12 months.

Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been
TRADING BUY
assigned due to positive newsflow.

NEUTRAL Total return is expected to be between -15% and +15% over the next 12 months.

SELL Total return is expected to be <15% over the next 12 months.

Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been
TRADING SELL
assigned due to negative newsflow.

SECTOR RECOMMENDATIONS

POSITIVE The sector is expected to outperform the overall market over the next 12 months.

NEUTRAL The sector is to perform in line with the overall market over the next 12 months.

NEGATIVE The sector is expected to underperform the overall market over the next 12 months.

MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad (23878 - X).
(Bank Pelaburan)
(A Participating Organisation of Bursa Malaysia Securities Berhad)

DISCLOSURES AND DISCLAIMER

This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for
distribution only under such circumstances as may be permitted by applicable law.
Readers should be fully aware that this report is for information purposes only. The opinions contained
in this report are based on information obtained or derived from sources that we believe are reliable.
MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or
implied, as to the accuracy, completeness or reliability of the information contained therein and it should
not be relied upon as such.
This report is not, and should not be construed as, an offer to buy or sell any securities or other financial
instruments. The analysis contained herein is based on numerous assumptions. Different assumptions
could result in materially different results. All opinions and estimates are subject to change without
notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF
AMANAH INVESTMENT BANK BERHAD.
The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may
have interest in any of the securities mentioned and may benefit from the information herein. Members
of the MIDF Group and their affiliates may provide services to any company and affiliates of such
companies whose securities are mentioned herein This document may not be reproduced, distributed or
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