KUALA LUMPUR: Hong Leong Investment Bank Bhd (HLIB Research) is mildly positive on Sunway REIT's (SunREIT) plans to acquire six Giant hypermarkets and a retail complex from Employees Provident Fund's (EPF) wholly-owned subsidiary, Kwasa Properties Sdn Bhd for RM520 million.
The bank-backed research firm said that based on a net property income (NPI) of RM42.1 million and RM520 million purchase price, the six properties are fetching an attractive NPI yield of 8.0 per cent.
This deal is yielding accretive when stacked against SunREIT's FY22 NPI portfolio yield of about 5.4 per cent, HLIB Research noted.
Recall that SunREIT's medical buildings are due for disposal in the first half (1H) of 2023 for RM430 million, these new properties will more than adequately fill up the rental void arising from the disposal.
"SunREIT has asserted that these hypermarkets are defensive relative to the conventional shopping malls, as reflected by the performance of Ipoh TF Value Mart during the pandemic, providing more stable income streams.
"However, we are a bit cautious about the deal as it will expand its portfolio exposure into the competitive retail sector compared to the services (education and healthcare) and industrial sector.
"That said, we are still overall mildly positive on the overall deal as a more attractive yield compensates the downside risk," HLIB Research said in a note today.
On Thursday, SunREIT proposed to acquire six Giant hypermarkets and retail complexes from EPF for RM520 million.
HLIB Research noted that the tenant at Giant had ceased operations in USJ despite the lease being active (expiring in 2028).
"However, we are not overly concerned about possible termination of the lease agreement, as the tenant will have to pay rent for the remaining unexpired term of the lease agreement.
"In the event of lease cessation, SunREIT is confident in replacing it with another tenant, potentially another hypermarket operator," HLIB Research said.
Touching on earnings per unit (EPU) impact, HLIB Research noted that its forecasted EPU for FY23 and FY24 will be adjusted by -2.0 per cent and +3.1 per cent, respectively, based on the firm's calculations.
This is assuming that the acquisitions are to be completed in the fourth quarter (Q4) of 2023, medical buildings are to be disposed of in the second quarter (Q2) of 2023, and a net increase of RM90 million in borrowings arises from the proceeds shortfall from the disposal against the proposed acquisitions, and there are minimal changes in property opex due to master lease arrangement.
"Our target price would then be adjusted upward to RM1.93," the firm noted.
The research firm also noted that after factoring in the ongoing disposal and acquisition exercises and the net changes in borrowings, SunREIT's gearing is expected to increase slightly from 37.6 per cent to 38.6 per cent in FY22.
"We maintain our forecast pending the completion of the aforementioned corporate exercises.
"Maintain Buy with a target price of RM1.87," it said.