sunway reit : the goliath of mreits - 23/09/2010

8/8/2019 Sunway REIT : The Goliath of MREITs - 23/09/2010

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Issued Capital (m shares) 2,680.1Market Cap (RMm) 2,586.3Daily Trading Vol (m shs) 2.152wk Price Range (RM) 0.875-0.97Major Shareholders: (% )Sunway City Berhad 36.6GIC 5.0EPF 8.4

FYE Jun FY11 FY12 FY13EPU chg (%) - - -Var to Cons (%) 3.8 6.2 7.8

Share Price Chart

Relative Performance To FBM KLCI

Loong Kok Wen, CFA(603) 92802237

[email protected]

Table 1 : Investment Statistics (SUNREIT; Code: 5176) Bloomberg: SREIT MK

Net Net

FY E Turnover profit EPU Growth PER DPU C.EPU* P/ NAV ROE Gearing GDY

June (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)2010F# 302.2 164.2 6.1 - 15.7 6.1 - 1.0 10.1 29.3 6.3

2011F 330.9 180.9 6.7 10.1 14.3 6.7 6.5 1.0 6.9 29.3 7.0

2012F 340.6 196.3 7.3 8.6 13.2 7.3 6.9 1.0 7.5 29.3 7.6

2013F 353.3 208.1 7.8 6.0 12.4 7.8 7.2 1.0 8.0 28.2 8.0

Main Market Listing /Trustee Stock/Syariah Approved Stock By The SC * Consensus Based On IBES Estimates# Audited financial results were not available

♦ The largest MREIT. Sunway REIT made its debut on 7th July 2010. It isthe largest REIT in Malaysia by market cap, asset size, and totaloutstanding units. It has 8 strategic commercial assets in its portfolio,which include three retail properties - Sunway Pyramid Shopping Mall inBandar Sunway, Sunway Carnival Shopping Mall in Penang and SunCityIpoh Hypermarket in Ipoh; three hotel properties – Sunway Resort Hotel & Spa and Pyramid Tower Hotel in Bandar Sunway, and Sunway HotelSeberang Jaya in Penang; and two office towers – Menara Sunway inBandar Sunway and Sunway Tower in KL. Total asset size is estimated atRM3.7bn.

♦ Investment case: (a) High investibility due to its large market value andfree float; (b) A portfolio of quality retail and commercial assets thatprovide sustainable and steady earnings growth; (c) Growing youngdemographics to support private consumption and retail spending growth;

and (d) A pool of assets available from Sponsor for future expansion inassets size.

♦ Risks and concerns. The risks include: 1) Sharp increase in interest ratethat will significantly affect borrowing costs; 2) Subdued office market inKlang Valley; 3) Outbreak of influenza which would affect tourist arrival;and 4) country risks.

♦ Earnings outlook. Our EPU forecasts are decent, estimated at 10%growth for FY11, on the back of slightly higher rental rate for SunwayPyramid Shopping Mall, as well as higher occupancy rate for Sunway ResortHotel & Spa and Pyramid Tower Hotel, supported by better macroeconomicenvironment and hence private consumption. Note that, we have notfactored in any potential acquisition of properties in our earningsprojections and balance sheet forecasts.

♦ Valuation. We assume 100% payout for Sunway REIT over the next threeyears. As such, our DPU forecasts translate to a gross yield of 7% and7.6% for FY11 and FY12. In line with our valuations for other REITs underour coverage (Axis REIT and Quill Capita), and based on our target MREITyield of 7% against our FY12 DPU forecast of 7.3 sen, our indicative fairvalue for Sunway REIT is RM1.05. We initiate coverage on Sunway REITwith an Outerform rating.

C o r p o r a t e H i g h l i g h t s

I n i t i a t e C o v e r a g e

Sunw ay REITThe Goliath of MREITs M

a l a s i a RHB Research

Institute Sdn BhdA member of theRHB Banking GroupCompany No: 233327 -M

23 September 2010

Please read important disclosures at the end of this report.

M A R K E T D A T E L I N E

P P

7 7 6 7 / 0 9 / 2 0 1 0 ( 0 2 5 3 5 4 )

Share Price : RM0.965Fair Value : RM1.05Recom : Outperform

(New Coverage)

Sunway REIT

FBM KLCI



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INVESTMENT CASE

♦ High investibility due to large market cap, asset size and total outstanding units . Sunway REIT is thelargest REIT in Malaysia thus far. It has eight assets in total - which include three retail properties - SunwayPyramid Shopping Mall in Bandar Sunway, Sunway Carnival Shopping Mall in Penang and SunCity IpohHypermarket in Ipoh; three hotel properties – Sunway Resort Hotel & Spa and Pyramid Tower Hotel in BandarSunway, and Sunway Hotel Seberang Jaya in Penang; and two office towers – Menara Sunway in Bandar Sunway

and Sunway Tower in KL. Total assets value as at 4QFY10 stood at RM3.73bn, the largest asset size amongst theREIT in Malaysia. Based on a unit price of RM0.965 (yesterday’s close) and total number of units of 2.68bn, itsmarket cap and free float (estimated) are also the largest at about RM2.6bn and 62%, respectively. Given thesefeatures, Sunway REIT is undoubtedly more appealing to institutional investors, due to its investibility andliquidity. Hence, these largely explain Sunway REIT’s current premium valuation compared to other MREITs.Currently, apart from Suncity’s 36.6% holdings in Sunway REIT, other institutional unitholders includeGovernment of Singapore Investment Corp (5%) and Employees Providend Fund (8.4%). Foreign shareholdingstood at at about 20-25% (including GIC’s stake).

Chart 2: Market cap of MREITs

123

337 354 394 406511 522

667752 816

1,020

1,512

2,586

0

500

1,000

1,500

2,000

2,500

3,000

A trium To wer UOA QC Hektar A mFirst A manah Raya A l-A qar Al-HadharahBoustead

A xis St ar hill C apit aM alls Sunway

R M m i l

Source: Company

Chart 3: Total assets of MREITs

18 2

51 9 59 974 8 77 7 81 8 86 6 90 8 1,011 1,044

1,657

2,185

3,360

0

50 0

1,000

1,500

2,000

2,500

3,000

3,500

4,000

A trium UO A T ower A manahRaya

H ektar Q C A l-HadharahBoustead

A xis A l- A qa r A mF irs t S tarhil l C a pita Ma lls S unwa y

RM mil

Source: Company



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♦ Portfolio of quality commercial assets. Out of the total eight assets of Sunway REIT, four assets(representing 85.5% of total property value) are concentrated at Bandar Sunway, which is a key master-plannedtownship that the Sponsor – Suncity has successfully developed over the years. Other retail and hotel assets arespread over the northern region of Peninsular Malaysia, namely Penang and Ipoh. Another office tower isstrategically located within the Kuala Lumpur city centre. Below is the details of the eight assets:

Property 1 – Sunw ay Pyramid Shopping Mall

Brief description Strategically located in Bandar Sunway, Selangor, it is the second largest shopping mall in Malaysia after

Mid-Valley (1.7m sq ft of NLA). It is considered a “regional”/”lifestyle” mall (as against a plain vanilla

“neighbourhood” mall) with a 12-screen Cineplex, an ice-skating rink, a 48-lane bowling alley and a

143,000 sq ft convention centre.

Rental basis As at Dec 2009, about 75% of tenancies were based on the greater of a fixed-base rent or turnover rent,with the remaining tenancies on a fixed-base rent basis.

NLA (sq ft) 1,685,568* No of tenancies 711

Parking bays (no) > 3,800 Top three tenants # (1) Jusco (2.6%)

Market value (RM m) 2,300 (2) Tanjong Golden Village (1.8%)

Age of building (years) 13 (3) Parkson Department Store (1.7%)

* 1,542,101,sq ft retail and 148,467 sq ft. convention centre # % of gross rental income for t he month of Feb 2010

Source: Company

Chart 4: Free float of M REITs

74 113 114 137 146 159255 272 286

379

487

688

1,535

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Atrium Al-HadharahBoustead

Hektar UOA Al-Aqar QC Amanah Raya To wer AmFirst Starhill Axis CapitaM alls Sunway

R M m i l

Source: Company (dated 20 th July 2010)



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Chart 5: Historical rental and occupancy rates

7.93

8.41

8.798.99

99 %98 %9 2%9 3%

7.00

7.50

8.00

8.50

9.00

9.50

FY 07 FY 08 FY 09 8 MFeb10

RM

0%

20 %

40 %

60 %

80 %

100%

N et re nt p sf/mo nt h Av g o cc up anc y ra te

Source: Company

Chart 6: Tenant mix by trade sector (Gross rental income)

35.2%

19.1%5.0%

4.7%

4.1%

2.8%

29.1%

Fashion & footwear

F&B

Department store

Leisure & entertainment

Electronics

Education & services

Others

Gross rental income for the month of Feb 2010

Source: Company

Chart 7: Projected lease expiry schedule

2.0%

60.2%

12.3%

24.8%

10.73

7.10

8.86

8.61

0%

10%

20%

30%

40%

50%

60%

70%

FY2010 FY2011 FY2012 Thereafter

0

2

4

6

8

10

12R M p s f

As % of NLA

Average monthly rental of expiring tenancies

Source: Company



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Property 2 – Sunway Carnival Shopping Mall

Brief description Strategically located within Pusat Bandar Seberang Jaya, an integrated township initiated by the Penang

state government. The mall is well positioned in an established commercial and industrial area serving the

niche market of shoppers from mainland Penang.

Rental basis For Feb 2010, about 33.8% of tenancies were based on the greater of a fixed base rent and turnover rent,

with the remaining tenancies on a fixed base rent basis

NLA (sq ft) 484,364 * No of tenancies 154

Parking bays (no) > 1,100 Top three tenants # (1) Parkson Department Store (12.9%)

Market value (RM m) 250 (2) GCH – Giant Hypermarket (5.5%)

Age of building (years) 3 (3) Sunway Carnival Convention Centre(2.9%)

* 452,072 sq ft. retail, 32,292 sq ft . convention centre # % of gross rental income for t he month of Feb 2010

Source: Company


27.5%

18.4%

12.7%

8.5%

7.4%

4.8%

20.7%Fashion & footwear

Department store

F&B

Education & services


Electronics

Others


Source: Company


3.823.66

3.17

87 % 92 %94 %

0.00

1.00

2.00

3.00

4.00

FY 08 FY 09 8 MFeb10

RM

0%

20 %

40 %

60 %

80 %

100%

N et re nt ps f/mo nt h Av g o cc up anc y ra te

Source: Company



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Property 3 – Sunway Ipoh Hypermarket

Brief description Strategically located in Sunway City Ipoh, an integrated township being developed by Suncity with

approximately 3,000 residentail and commercial properties by 2018. On top of residential and commercial

developments, the township also has leisure (Lost World of Tambun Theme Park), hospitality (The Banjaran

Hotsprings Retreat) and education properties. These properties are expected to attract domestic and

international visitors and increase the population in the catchment area of SunCity Ipoh Hypermarket.

Rental basis 6+3+3 lease agreement with monthly rental of RM214k in 2007, RM318k in 2008; RM334 in 2009 & 2010;

RM350k in 2011.

NLA (sq ft) 181,216 No of tenancies 1

Parking bays (no) 400 Top three tenants # Giant (100%)

Market value (RM m) 50

Age of building (years) 5

Source: Company


45.6%

4.4%2.9%

42.0%4.65

2.92

3.64

2.83

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

FY2010 FY2011 FY2012 Thereafter0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0R M p s f

As % of NLA


Source: Company



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Property 4 – Sunw ay Resort Hotel & Spa

Brief description A 19-storey five-star hotel, primarily serving business and upper leisure customers, with 439 guest rooms

and three villas. It is well positioned within Bandar Sunway with direct links to Sunway Pyramid Shopping

Mall, Sunway Pyramid Convention Centre, Pyramid Tower Hotel and Sunway Lagoon. The hotel enjoys a

strong corporate customer base with many business travellers to Petaling Jaya and Shah Alam choosing a

stay at the hotel in Bandar Sunway.

Rental basis Generally, the master lease agreements signed between Sunway REIT and the hotel operator (i.e. parent

Sunway City) are structured in such a way that there is approximately 80% guarantee to the expected

FY06/11 hotel rental revenues to Sunway REIT in FY06/11-12, and approximately 60% in FY06/13-20,

irrespective of the hotels’ performance. As such, Sunway REIT’s rental revenues from these hotelseffectively carry performance risks to a maximum of 20% of the expected FY06/11 hotel rental revenues in

FY06/11-12, and 40% in 06/13-20. The mitigating or balancing factor is that Sunway REIT also shares the

upside based on certain formulas if the hotels’ performance exceeds expectations.

GFA (sq ft) 1,050,497 Average room rate & occupancy rate

Parking bays (no) > 640 (1) FY06/07 – RM302 per night; 74.1%

Market value (RM m) 480 (2) FY06/08 – RM384 per night; 78%

(3) FY06/09 – RM409 per night; 61%Age of building (years) 13 years (Sunway Resort

Hotel & Spa) 6 years

(three villas)

(4) 8MFY06/10 – RM397 per night; 66.1%

Source: Company


1.17

1.74

1.87 1.87

1 0 0 % 1 0 0 % 1 0 0 % 1 0 0 %

0.00

0.50

1.00

1.50

2.00

FY 0 7 FY 0 8 FY 0 9 8 M Feb1 0

RM

0 %

1 0 %

2 0 %

3 0 %

4 0 %

5 0 %

6 0 %

7 0 %

8 0 %

9 0 %

1 0 0 %

Rent ps f/month A vg oc cupanc y rate

Source: Company



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Property 7 – Menara Sunway

Brief description A 19-storey prime office building in Bandar Sunway. It comprises an office tower with an annex and more

than 660 car parking bays. Unlike a standalone office building, Menara Sunway is marketed as an office

environment, where its tenants can take advantage of the convention centre and the surrounding

hospitality, leisure and retail options offered by the Sunway Integrated Resort. We see relatively low

occupancy risk as compared to Sunway Tower, as the majority of the tenancies are with entities owned by

or affiliated with Sunway group of companies.

Rental basis Tenancy agreements are generally for terms of three years with an option to renew for another one to two

terms of two to three years each. Under the tenancies, tenants are normally responsible for payment of

their own utilities. Tenants are generally also responsible for repairs, as well as the payment of all other

expenses relating to the interior of the premises, while landlord is generally responsible for repairing the

exterior and main structure of the building.NLA (sq ft) 268,978 No. of tenancies 36

Parking bays (no) > 600 Top three tenants # Sunway City - Sponsor (18.0%)

Market value (RM m) 138 Maxis Mobile Sdn Bhd (15.1%)

Age of building (years) Sunway Management Sdn Bhd (14.2%)

# % of gross rental income for the month of Feb 2010

Source: Company

17


144152 153 158

81.2%78.5%

78.8% 76.7%

0

50

10 0

15 0

20 0

FY07 FY08 FY09 8MFeb10

RM

0%

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100%

A vg daily rate A vg occupancy rate

Source: Company

Chart 17: Customer contribution (roo m revenue)

64.0%

36.0%

Corpora te Leisure /Other

8

Room revenue for the month of Feb 2010

Source: Company



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3.293.22

2.79

2.46

97.7%97.3%

88.6%94.0%

0

1

2

3

4

5

FY07 FY08 FY09 8 MFeb10

RM

0%

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100%

Net rent ps f/month A vg oc cupanc y rate

Source: Company


22.9%

18.0%

15.1%

12.5%

8.0%

3.2%

3.2%

3.1%

14.0%Management s ervices

Property

C ommunication

Construction

Medica l

Technology

Trading

Leasing

O ther trades


Source: Company


1.7%

15.7%

2.4%

78.8%

2.352.63

3.08

3.44

0%

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

FY2010 FY2011 FY2012 Thereafter

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0R M p s f

As % of NLA


Source: Company



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Property 8 – Sunway Tower

Brief description Strategically located in Kuala Lumpur’s Golden Triangle/CBD within proximity of many prime-grade office

buildings, international class four and five star hotels, high quality amenities and facilities, including several

major shopping centres. It is readily accessible from two nearby LRT stations and the Ampang-Kuala

Lumpur Elevated Highway.

Rental basis Tenancy agreements are generally for terms of three years with an option to renew for another one to two

terms of two to three years each. Under the tenancies, tenants are normally responsible for payment of

their own utilities. Tenants are generally also responsible for repairs, as well as the payment of all other

expenses relating to the interior of the premises, while landlord is generally responsible for repairing the

exterior and main structure of the building.

NLA (sq ft) 268,412 No. of tenancies 14

Parking bays (no) > 290 Top three tenants # Ranhill Worley Parsons Sdn Bhd (66.1%)

Market value (RM m) 185 Alcatel-Lucent Malaysia Sdn Bhd (18.9%)

Age of building (years) Worley Parsons Service Sdn Bhd (4.5%)

# % of gross rental income for the month of Feb 2010

Source: Company

14


3.353.48

4.2767.1%70.1%

95.9%

0

1

2

3

4

5

FY08 FY09 8MFeb10

RM

0%

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100%

N et rent ps f/month A vg oc cupancy rate

Source: Company


70.6%

19.1%

1.6%

1.9%

3.3%

0.5%

0.2%2.8%Consultancy (O&G)

Communication

Accounting

Embassy

Glove manufacturer

Consultancy

Food & beverages



Source: Company



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♦ A pool of assets available from Sponsor for future expansion in asset size. Sunway REIT plans to doubleits asset base in five years time. In our view, this does not appear to be a tall order given parent Sunway City still

holds a decent portfolio of “REITable” assets including Sunway Medical Centre, Sunway University College andMonash University Sunway Campus, as well as various investment properties under development such as thenewly completed Sunway Giza. Under the agreement, Sunway REIT has the first rights of refusal, which means inthe event if Suncity intends to offer its investment properties for sale to any third party at a specific offer priceand at specific terms, Suncity shall first extend the offer to Sunway REIT at the same or better offer price andterms. However, we opine that, for Suncity to inject the new assets into the REIT, it may probably take 4 – 5years time until the new assets mature. As such, over the intermediate term, acquisition of new properties islikely to come from external. To recap, Sunway Medical Centre, Sunway University College and Monash UniversitySunway Campus were not included in Sunway REIT during its IPO as the properties either had just completed amajor expansion or were embarking on one. We believe the earnings volatility arising from temporary disruptionin operations, and hence lower yield, made them less suitable to be included into Sunway REIT. In our view, thiswill change as and when their operations normalise and yields show signs of stability over the medium term.

Concerns And Mitigating Factors

♦ Substantial interest rate hikes that affect borrowing costs . Unless interest rate is raised substantially byBank Negara Malaysia, we believe gradual increases in interest rate (25 bps per hike) will have mild impact onSunway REIT’s finance costs. Currently, Sunway REIT has a capital structure that will be able to reducerefinancing risk as well as to provide a hedge against movements in interest rates. Current gearing stood at about30%, and exposure to fixed and variable rates is about equal. Weighted average tenure for the RM1bn term loanis three years. Given the various tranches of term loan maturity (2, 3 and 4 years), refinancing risk is thereforerelatively low over the short term.

Chart 25: Private consumption grow th

0

50

10 0

15 0

20 0

25 0

30 0

35 0

2 0 00 2 0 01 2 0 02 2 0 03 2 0 04 2 0 05 2 0 06 2 0 07 2 0 08 2 0 09 2 0 1 0 f

RM bn

40

45

50

55

Private consumption Private consumption's share of GDP

Source: DOS

Chart 26: Retail sales in Malaysia

19.824.1

3 0.4 3 0.533.2

37.9

44.2

51.6

0

10

20

30

40

50

60

2 00 6 2 00 7e 2 0 08 e 2 00 9f 2 01 0f 2 01 1f 2 01 2f 2 01 3 f

US$bn

Source: Business Monitor International

Chart 27: Potential acquisition targets from SponsorAlready in operation Under planning

(1) Sunway Medical Centre (1) Sunway South Quay - a mixed development within Bandar Sunway(2) Sunway University College (2) 28-storey commercial development adjacent to Sunway Pyramid Shopping Mall(3) Monash University Sunway Campus (3) The Pinnacle - a new 25-storey office tower in Bandar Sunway(4) Sunway Giza Shopping Mall, Sunway Damansara (4) Sunway Monash University Residence - student hostels(5) Sunway Hotel Georgetown, Penang (5) Sunway Velocity - a RM1.5bn mixed commercial development in KL(6) Sunway Hotel, Phnom Penh (6) Sunway Damansara - an integrated development township

Source: Company



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♦ Subdued office sector in the Klang Valley . The office sector in the Klang Valley is expected to remainsubdued over the short to medium term, weighed down by massive incoming new supply. International propertyconsultants CBRE estimated that in 2010-2013, in terms of NLA, 21.4m sqf will come into the market, translatingto 28% of total supply of 77m sqf as at end 2009. For Sunway REIT, the mitigating factor is, in terms of value,office properties only make up 9% of Sunway REIT’s total asset base. In addition, the occupancy risk at MenaraSunway is low given that it is about 60% occupied by Sunway group of companies. As for Sunway Tower, bulk of its lease expiry (85.7% of NLA mostly tenanted by Ranhill Worley Parsons and Alcatel-Lucent) is concentrated inFY12, which is still relatively remote from now.

♦ Tenant concentration risk . Sunway REIT has relatively low tenant concentration risk, considering its diversedgroup of tenants for most of its properties. Among the eight properties, only Sunway Tower and SunCity IpohHypermarket are exposed to high tenant concentration risk. For Sunway Tower, Ranhill Worley Parsons andAlcatel make up about 90% of the property’s gross rental income. As for SunCity Ipoh Hypermarket, the soletenant is Giant Hypermarket. Nevertheless, the mitigating factor is that, both properties contribute less than 5%of our FY11 total revenue forecast for Sunway REIT.

Chart 28: Term loan (RM 1bn) maturity profile

240

160

99

60 240

201

0

50

10 0

15 0

20 0

25 0

30 0

35 0

40 0

45 0

2 year 3 year 4 year

RM mil

F ix ed ra te Va ri abl e ra te

Source: Company

Chart 29: Fixed vs variable rate mix (term loan RM1bn)

Variable rate,50.1%

Fixed rate,49.9%

Source: Company

Chart 30: Future supply of o ffice space in the Klang Valley

2.4 2.83.9

7.11.6

3.3

0.3

0

0

2

4

6

8

10

12

2010 2011 2012 2012 /13

NLA (mil sqf)

Kuala Lumpur Selangor

Source: CBRE

Chart 31: Avg rental psf/mo nth for Golden Triangle, CBD

and Damansara Heights

2.00

3.00

4.00

5.00

6.00

7.00

1 Q 0 5

3 Q 0 5

1 Q 0 6

3 Q 0 6

1 Q 0 7

3 Q 0 7

1 Q 0 8

3 Q 0 8

1 Q 0 9

3 Q 0 9

1 Q 1 0

RM psf

G ol de n T ri angl e C ent ra l B us ine ss D is tric t

Damansara Heights

Source: Knight Frank



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FINANCIAL OUTLOOK

♦ Rising retail sales to underpin higher rental rates of shopping malls. We believe the continued growth inretail sales in Malaysia will support better rental reversion (growth) of shopping malls, driving Sunway REIT’sbaseline organic growth. Between FY06/07 and 8MFY06/10, average monthly net rental of Sunway PyramidShopping Mall, which dominates more than 60% of Sunway REIT’s asset value, grew at a CAGR of 4.3% fromRM7.93 psf to RM8.99 psf. This was despite the onslaught of the global financial crisis in 2008 – 2009. In ourearnings forecasts, we estimate Sunway Pyramid Shopping Mall’s steady net monthly rental growth at 2-3% per

annum for FY11-FY13, underpinned by a brighter macroeconomic outlook, and Bandar Sunway’s growingpopulation base as well as influx of students, tourists and medical tourists.

JLW Research estimated that Bandar Sunway’s population base grew at a CAGR of 4% between 2000 and 2009,from 437,121 to 622,160. We believe the growth rate will sustain going forward, underpinned by, among others,a new component of Bandar Sunway called Sunway South Quay. The middle-upper market lakeside homesproject will house 4,000 new households in Bandar Sunway over its project period estimated at seven years.Based on Malaysia’s average urban household size of 4.5 people in 2000, this translates to 18,000 potential newresidents in Bandar Sunway. In addition, we foresee increased arrivals of students and medical tourists to BandarSunway with continued expansion of Sunway Medical Centre, Sunway International School, Sunway UniversityCampus and Monash University Sunway Campus, and tourists on the back of continuous government-sponsoredtourism promotional efforts in overseas markets. All these will translate to higher levels of commercial activitiesand demand for support services that will in turn draw in even more traffic to Bandar Sunway.

♦ Gross gearing. Currently, Sunway REIT has a gearing (total borrowings/total assets) of about 30%, which is inline with the MREIT sector average. To fund its future acquisitions, Sunway REIT has the capability to gear up

further, but capped below 50% as required under the SC guidelines on REITs. Internally, management has agearing target of 40%. Hence, we estimate that Sunway REIT will have the capacity to raise an additionalRM300m-350m. Nevertheless, over the longer term, we expect Sunway REIT to fund acquisitions via acombination of placement and borrowings, to have a balance between gearing and dilution on EPU.

♦ Distribution policy . According to Sunway REIT prospectus, the REIT Manager intends to distribute at least100% of Distributable Income for FY10 and FY11. According to our forecasts, this translates to a DPU of 6.7 senand 7.3 sen for FY11 and FY12, suggesting a yield of about 7-8%. Note that, we have not imputed anycontribution from potential yield accretive acquisitions in the future. Beyond FY11, the distribution policy is atleast 90%.

Chart 32: Resilient rental rates at Sunway Pyramid Shopping Mall

Data is shown on a December year-end basis. Gross rentals inclusive of the convention centre but excluding car park, the ice skating

rink and promotion.

Source: Jones Lang Wootton Market Overview Report dated 27 May 2010



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VALUATION

♦ Initiate coverage with Outperform recommendation. In line with our valutations for the REIT sector, weapply a target MREIT yield of 7% on our FY12 DPU forecast of 7.3 sen for Sunway REIT. Our indicative fair valueis therefore RM1.05 (IPO price for institutional and retail investors was RM0.90 and RM0.88). We intiate coverageon Sunway REIT with an Outperform rating.

Table 2. Earnings Forecasts

FYE June (RMm) 2010f 2011f 2012f 2013f

Revenue 302.2 330.9 340.6 353.3

Gross Profit 258.8 280.2 293.6 303.1

EBIT 260.7 218.6 243.9 255.7

Interest income 0.0 0.0 0.0 0.0

Finance costs (38.7) (47.6) (47.6) (47.6)

PBT 221.9 171.0 196.3 208.1

Exceptional item 88.8 0.0 0.0 0.0

Tax + minority interest 0.0 9.9 0.0 0.0

Normalised net profit 164.2 180.9 196.3 208.1

Normalised EPU 6.1 6.7 7.3 7.8

Gross DPU 6.1 6.7 7.3 7.8

Dividend payout 100.0 100.0 100.0 100.0

Source: Company, RHBRI estimates

Table 3. Balance Sheet And Cashflow Forecasts

FYE June (RMm) 2010f 2011f 2012f 2013f

Non-current assets 3,729.0 3,739.0 3,739.3 3,739.7

Current assets 51.7 39.3 41.5 44.3

Total assets 3,780.7 3,778.3 3,780.7 3,784.0

Unitholders’ capital 2,680.1 2,680.1 2,680.1 2,680.1

Reserves (1,486.6) (1,486.6) (1,486.6) (1,486.6)

Retained earnings 1,416.7 1,416.7 1,416.7 1,416.7

Minority interest 0.0 (9.9) (9.9) (9.9)

Unitholders fund 2,610.3 2,600.4 2,600.4 2,600.4

Long term liabilities 1,010.5 1,010.5 1,010.5 1,010.5

Current liabilities 159.9 167.3 169.8 173.1

Cash Flow (RMm) 2010f 2011f 2012f 2013f

Operating cash flow 187.3 223.6 245.6 257.9

Investing cash flow (553.6) (10.0) (0.3) (0.4) financing cash flow 3,304.0 (228.5) (243.9) (255.7)

Source: Company, RHBRI estimates

sunway reit : the goliath of mreits - 23/09/2010

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