Analysts positive on Sunway REIT’s RM550 mln academic asset acquisition
KUALA LUMPUR: Local analysts are positive on the recent announcement from Sunway Real Estate Investment Trust (Sunway REIT) that it will be acquiring academic assets from Sunway Bhd (Sunway) for a total cash consideration of RM550 million.
On Monday, Sunway REIT had entered into a conditional sale and purchase agreement with an indirect wholly-owned subsidiary of Sunway for the acquisition of three parcels of land and several academic buildings.
The parcels of land measure at 733,237 square feet and the buildings include three blocks of academic buildings, four blocks of walk-up hostel apartments and sports facilities with 1,880,338 sf of gross floor area.
It is understood that the assets currently houses the Sunway University Campus and that they are leased to Sunway Education Group Sdn Bhd for an initial lease term of 30 years, with an option to renew for a second term of 30 years and third term of 18 years – all the way up to March 31, 2097.
Overall, analysts have been rather positive on the acquisition for Sunway REIT as the acquisition would be earning accretive for Sunway REIT, providing it a stable and sustainable income stream over the next 30 years at the very least.
“This is the longest tenure among Malaysian REITS under over coverage, increasing Sunway REIT’s weighted average lease expiry to 4.39 years from 1.99 years,” said the research arm of Kenanga Investment Bank Bhd (Kenanga Research).
Similarly, Affin Hwang Investment Bank Bhd (AffinHwang Capital) was mildly positive on the acquisition as the price tag looks fair with a translation to an initial gross yield of 6.95 per cent per annum while further aiding to the diversification of Sunway REIT’s asset mix.
Meanwhile, on Sunway’s side, analyst MIDF Amanah Investment Bank Bhd (MIDF Research) details that they are slightly positive on the proposed disposal for Sunway as it would allow the group to unlock the value of its investment properties and improve its balance sheet.
“Sunway is expected to reap a disposal gain as the original cost of investment was RM382 million. It intends to use RM238.57 million of the gross proceeds from the proposed disposal for repayment of borrowings. Net gearing of Sunway is expected to improve to 0.43 times from 0.46 times as of 3QFY18.
“Meanwhile, earnings impact from the proposed disposal is expected to be minimal. Sunway is expected to gain finance expenses saving of RM9.9 million per annum which is equivalent to 1.6 per cent of FY19 earnings,” the analyst added.
Sunway REIT is expected to satisfy the cash consideration by 2HFY19 via borrowings. Kenanga Research estimates that the REIT’s gearing will increase to 0.43 to 0.45 times in FY19 to 20.
As this is close to the max gearing limit of 0.50 times for most Malaysian REITs, Kenanga Research reckons that the REIT may opt to raise its equity financing jn the near term.
Overall, the acquisition was not unexpected as Kenanga Research guided that the REIT has always been keen on acquiring Sunway’s assets. Additionally, the REIT has guided that it is continuing to look to grow in other segments more actively in the longer term, such as industrial, healthcare and education.
Kenanga Research maintained its market perform call on the stock with an increased target price to RM1.65 while AffinHwang Capital maintained its buy call with an unchanged target price of RM1.95.
MIDF Research maintained its neutral call on Sunway with an unchanged target price of RM1.48 as they see its new sales and earnings outlook to be tepid in the short to medium-term amidst a slowing property segment.