Investment Highlights

• We maintain our HOLD recommendation on Sunway REIT (SREIT) with a revised fair value of RM1.69 (from RM1.68) after rolling over our 6% target yield from FY19 to FY20. We are revising our FY19–21 distributable income downwards by 5.2%, 4.0% and 3.1% respectively by factoring higher finance charges into our forecasts.

• SREIT recorded its 1HFY19 revenue of RM282.6mil (+0% YoY), mainly contributed by stronger performance by retail (+1%) and office segment (+16%) but offset by weaker performance in hotel segment (-12%) as a result of disruption in income due to the closure of the Sunway Resort Hotel & Spa (SHRS) grand ballroom and meeting rooms; higher room preventive maintenance cost and lack of demand in group corporate bookings which impacted Sunway Putra Hotel. Meanwhile, PBT fell by 7.2% YoY as a result of higher finance expenses (+19.7%) due to higher principal loan amount, mainly to fund acquisitions and capex.

• SREIT’s 1HFY19 distributable income of RM140mil (-5.9% YoY) came in slightly below expectation at 47% of both our full-year forecast and the full-year consensus estimates respectively. YTD NPI increased marginally by 0.2% to RM214.7mil due to lower operating expenses. SREIT recommended a DPU of 2.25 sen as compared with 2.38 sen YoY (QoQ: 2.48 sen).

• The retail segment reported a 1HFY19 revenue of RM210.2mil (+1.4% YoY) supported by Sunway Pyramid Shopping Mall but partially offset by Sunway Putra Mall. Meanwhile, its NPI grew by 3.0% YoY to RM153.6mil due lower A&P expenses in Sunway Pyramid. Sunway Pyramid Shopping Mall’s revenue and NPI rose by +3.4% and 2.4% to RM161.0mil RM126.7mil respectively. YTD occupancy rates at Sunway Pyramid, Carnival and Putra Mall remained stable at 99.0%, 98.2% and 91.0% respectively (vs. 98.4%, 96.2% and 89.4% YoY).

• The hotel sector’s 1HFY19 revenue and NPI slid by 12.5% and 17.2% to RM40.2mil and RM36.4mil respectively, mainly due to weaker performance in SHRS. SHRS recorded softer average occupancy rate of 64.2% in 1HFY18 versus 82.1% YoY, mainly attributable to the ongoing refurbishment of the grand ballroom and meeting rooms which has been completed by 2QFY19.

• The office sector’s 1HFY19 revenue and NPI expanded by 16.0% and 34.4% to RM18.4mil and 10.3mil respectively on the back of improved performance from Sunway Putra Tower and Wisma Sunway, with commencement of new tenants and expansion from existing tenant, respectively.

• Debt-to-total assets ratio increased to 38% vs. 33% YoY mainly due to higher investing activities. Nevertheless, it is still below the regulatory threshold of 50%.

Source: AmInvest Research - 15 Feb 2019