Acquiring Kluang Mall for RM158mn

Sunway REIT has entered into a conditional sale and purchase agreement with Tenaga Nusantara Sdn Bhd to acquire a shopping complex known as Kluang Mall located in Johor for RM158mn. The deal is expected to be completed by 4Q24.

Located in Kluang town centre, this four-storey shopping complex serves over 320,000 residents in the Kluang district and up to 1 million people in central Johor, including Batu Pahat, Ayer Hitam, Kulai, and Mersing. This four-storey shopping complex spans approximately 808,000 sq. ft. of gross floor area and 360,000 sq. ft. of net lettable space, with 920 car park bays. Currently 99% occupied by over 130 tenants, it is anchored by Pacific Hypermarket & Department Store and features a diverse mix of F&B outlets, lifestyle, and entertainment options, including GSC Cinema, Ampang Superbowl, Popular, H&M, Starbucks, Skechers, Coffee Bean, KFC, Body Shop, Face Shop, and Machines. This variety caters to families, students, and working professionals in central Johor. 

A Decent Yield of 6.8%

Management expects the proposed acquisition to generate an indicative net property income (NPI) yield of approximately 6.8% based on the purchase consideration. This stands favourably against Sunway REIT's property portfolio yield of 5.7% in FY23. In addition, an independent market valuer appointed by Sunway REIT appraised the property's market value at RM165mn, and the purchase consideration represents a discount of approximately 4.2% to this value.

The proposed acquisition will be fully financed through bank borrowings. It is expected to slightly increase Sunway REIT’s gearing ratio from 40.1% as at 31 Mar-24 to 41.1%.

Our View

Upon successful completion of the proposed acquisition, Sunway REIT's assets under management will increase to RM9.8bn. This aligns with Sunway REIT's TRANSCEND 2027 target of growing the total property value to RM14-15bn by FY27.

The acquisition of Kluang Mall allows Sunway REIT to expand into central Johor, a region set to benefit from upcoming infrastructure projects like the Gemas-JB Electrified Double Tracking rail project and various road improvements along the Batu Pahat- Ayer Hitam – Kluang federal route. While the mall has already experienced strong occupancy and footfall growth in recent years, Sunway Group’s renowned branding and expertise in retail

management is expected to further enhance Kluang Mall through tenancy optimisation and asset improvements.

Overall, we view the proposed acquisition positively due to the asset's strategic location, attractive pricing, and the potential for increased NPI through optimising the tenant mix and implementing asset enhancement initiatives.

Impact

Assuming the property starts contributing to Sunway REIT's earnings in 1Q25, the proposed acquisition is expected to boost our FY25 and FY26 earnings forecasts by approximately 2%. However, we will maintain our current earnings forecasts until the acquisition is finalised.

Recommendation and Valuation

Incorporating a 3% ESG premium, we adjust our TP to RM1.93/unit from RM1.88/unit previously. Our TP is based on an unchanged target yield of 6.0%. Maintain Buy.

Source: TA Research - 9 Aug 2024