Acquiring Industrial Property in Penang for RM66.8mn

Sunway REIT has entered into a conditional sale and purchase agreement with Best Corridor Venture Sdn. Bhd. to acquire an industrial property in Bukit Tengah Industrial Park, Prai, Penang for RM66.8mn. This marks Sunway REIT's first industrial asset acquisition in Penang. The deal is expected to be completed by 3Q24.

Situated strategically within the Bukit Tengah Industrial Park, the property is adjacent to Juru Auto City, 12km southeast of Butterworth and 7km southwest of Bukit Mertajam. It is also in proximity to Sunway REIT's existing properties in Penang, approximately 12km from Sunway Carnival Mall and Sunway Hotel Seberang Jaya - see Appendix 1 for the location of the property.

The property, sitting on 10.4 acres land with a leasehold tenure expiring in 2052, has a gross floor area of 307,487 sq.ft. It is fully occupied by reputable multinational tenants: Premium Sound Solutions, a Belgian sound products manufacturer, alongside a Japanese logistics company and an American information management services company. Sunway REIT plans to extend the land's leasehold tenure to 60 years post-acquisition – see Appendix 2 for property information.

Decent Yield of 7.0%

According to the announcement, the proposed acquisition is expected to generate an initial net property income (NPI) yield of approximately 7.6% based on the purchase consideration. After taking into consideration the potential leasehold extension premium to be paid, it is envisaged that the property will generate a NPI yield of approximately 7.0%. This stands favourably against Sunway REIT's property portfolio yield of 5.4% in FY22.

The proposed acquisition will be fully funded by bank borrowings. The proposed drawdown of new borrowings will increase Sunway REIT’s gearing ratio slightly from 37.4% as at 30 Sep-23 to 37.8%.

Our View

The acquisition price of RM147.45psf for the factories in Bukit Tengah Industrial Park is considered fair, given the asking price of c.RM130 – RM260psf for similar-sized factories, according to various property websites. Besides, the purchase price is comparable to CLMT’s acquisition of a logistic property sitting on a land spanning approximately 12.6 acres in Valdor Industrial Area, announced in June 2022, at an acquisition price of RM146psf. See Appendix 3 for major industrial parks in Penang.

This acquisition aligns with Sunway REIT's strategic goal of enhancing portfolio diversity, contributing to its TRANSCEND 2027 target of having the Services, Industrial, and Others segments constitute 20% - 30% of the property value by 2027. Upon completion of the proposed acquisition, Sunway REIT's assets under management will reach RM8.9bn, with Services, Industrial & Others comprising about 9.0% of the portfolio. However, due to the relatively small size of the asset and its limited impact on earnings, we are neutral on this acquisition.

Impact

Assuming the property starts to contribute to Sunway REIT’s earnings from 4Q24 onwards, the proposed acquisition is projected to increase our earnings forecasts by 0.3% in FY24 and 1.3% in FY25.

However, we maintain our current earnings forecasts pending the completion of the acquisition.

Recommendation and Valuation

No change to our TP of RM1.75/unit, which is based on a target yield of 6.0% to our CY24 DPU projection of 10.5/unit. Maintain Buy.

Source: TA Research - 19 Dec 2023