Investment Highlights

• We maintain our HOLD recommendation on Sunway REIT (SREIT) with an unchanged fair value of RM1.75 based on FY20 target yield of 6%. We keep our FY19F–21F numbers unchanged at RM281.3mil, RM308.3mil and RM326.7mil respectively.

• SREIT’s 9MFY19 distributable income of RM215.7mil (-1.3% YoY) came in within expectation at 76% and 74% of our and consensus’ full-year estimates. 9MFY19 revenue grew by 2.5% YoY to RM434.7mil mainly contributed by a stronger performance in the: (i) retail segment (+1.8%); (ii) office segment (+16.5%); and (iii) contribution from the Sunway Clio property (+RM18.8mil).

• YTD NPI increased 2.8% to RM328.5mil, in line with revenue growth. Nonetheless, distributable income fell by 1.3% due to the provision of deferred taxation at 10% on unrealised fair value gain of freehold land amounting to RM6.9mil.

• SREIT recommended a DPU of 2.58 sen in 3QFY19 as compared with 2.37 sen YoY (QoQ: 2.25 sen).

• The retail segment reported a 9MFY19 revenue of RM320.9mil (+1.8% YoY) supported by Sunway Pyramid Shopping Mall but partially offset by Sunway Putra Mall. Meanwhile, its NPI grew by 3.1% YoY to RM233.2mil due lower property operating expenses. YTD occupancy rates at Sunway Pyramid, Carnival and Putra Mall remained stable at 98.5%, 97.9% and 90.8% respectively (vs. 99.1%, 97.0% and 90.5% YoY).

• The hotel sector’s 9MFY19 revenue and NPI slid by 0.5% and 4.5% to RM60.6mil and RM57.9mil respectively, mainly due to lower income in Sunway Resort Hotel and Spa (SRHS) and Sunway Putra Hotel but mitigated by contribution of income guarantee from Sunway Clio Property. The refurbishment of the grand ballroom and meeting rooms at SRHS has been completed in 2QFY19 and these have resumed operation.

• The office sector’s 9MFY19 revenue and NPI expanded by 16.5% and 28.5% to RM28.4mil and 15.5mil 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.

• Management has guided flattish growth for FY19, hence we are keeping our numbers unchanged. Debt-to-total assets ratio climbed to 38% vs. 37% YoY mainly due to higher investing activities. Nevertheless, it is still below the regulatory threshold of 50%.

• We like SREIT for its strong brand name in the shopping complex segment which posted average occupancy rate of more than 90% over the past 3 years. However, SREIT’s share price has gone beyond its fundamentals and does not provide much potential upside, hence we maintain our HOLD recommendation

Source: AmInvest Research - 3 May 2019