• Maintain BUY, with new DDM-derived MYR1.92 TP from MYR1.85, 16% upside and c.7% FY25F yield. Our sector top pick Sunway REIT is recalibrating its strategic roadmap, TRANSCEND 2027, to refocus its efforts on its core strengths in retail, and foregoing its previous targets to strictly rebalance its portfolio with a higher mix of services, industrial, as well as adding foreign properties. We are positive on the strategic change as we think this affords the REIT more room to focus on yield-accretive acquisitions, via organic and inorganic fronts.

• Key change. Previously, one of the targets under the roadmap was to rebalance the REIT’s portfolio such that services, industrial, and others would make up 20-30% of its property value, while diversifying into foreign properties would comprise 10-20% of assets under management. With the changes in market dynamics since it was initially introduced in 2021 such as the compressed yield for industrial properties, we think the earlier goal would have restricted the REIT’s ability to find yield-accretive acquisitions. Instead, SREIT will now be open to strategic opportunities among the different sectors without imposing a specific target.

• Entrenching its footprint in Malaysia’s retail sector. While not diversifying away from retail, management emphasised that there are multiple categories within the retail segment which the REIT wishes to invest in. The first is “regional malls”, with a target market of the population within 50km and NLA >500k sqf. The highly successful Sunway Carnival Mall in Penang fits this category – Penang mainland was an underserved market as shoppers previously had to travel to Penang Island for more shopping options. We think that these regional malls outside the Klang Valley would do well given the more favourable supply-demand dynamics. Capitaland Malaysia Trust’s (CLMT MK, NR) Gurney Plaza, Queensbay Mall, and East Coast Mall, which collectively enjoy close to full occupancy and recorded 10.2% rental reversion in 1H24, are good examples. Hence, we are confident with the upcoming Sunway City Ipoh Mall that is located next to Lost World Water Park and future medical centre. The mall will likely open in mid-2027, and should drive the future growth of SREIT upon injection from the Sponsor.

• Neighbourhood malls to balance the retail portfolio. Another category that SREIT plans to invest in is “neighbourhood malls”, with a smaller target market and NLA. These properties are more resilient with their F&B and services offerings serving the local community. SREIT’s ongoing acquisitions in this category such as 163 Mall and Kluang Mall, offer >90% occupancy rates and a healthy 6.5-6.8% NPI yield. Going forward, management expects the malls to deliver mid-single digit rental reversions.

• ESG: Our TP includes a 4% ESG premium. Key risks: Lower-than-expected occupancy and rental reversions, and longer-than-expected delays in acquisitions .

Source: RHB Research - 26 Aug 2024