Investment Highlights

• We maintain our HOLD recommendation on Sunway REIT (SREIT) with a revised fair value of RM1.97 (from RM1.75) as we roll over our valuation to CY20 based on a target yield of 5.5%. We lower our target yield to 5.5% from 6.0% in view of the possibility that BNM may cut interest rates. We keep our FY20F–21F numbers unchanged at RM308.3mil and RM326.7mil respectively while introducing FY22F distributable income forecast at RM337.4mil.

• FY19 distributable income of RM286.5mil (+1.6% YoY) came in within expectation at 102% and 98% of our and consensus’ full-year estimates. FY19 revenue grew by 3.5% YoY to RM580.3mil mainly contributed by a stronger performance in the following: (i) retail segment (+2%); (ii) office segment (+15%); and (iii) contribution from the Sunway Clio property (+RM18.4mil).

• YTD net property income (NPI) increased by 4.7% to RM439.7mil, in line with revenue growth. SREIT recommended a DPU of 2.28 sen in 4QFY19, bringing the total payout for FY19 to 9.59 sen (YoY: 9.57 sen).

• The retail segment reported an FY19 revenue of RM426.7mil (+2% YoY) supported by Sunway Pyramid Shopping Mall but partially offset by Sunway Putra Mall. Meanwhile, the retail segment’s NPI rose 5% YoY to RM310.5mil due lower property operating expenses. YTD occupancy rates at Sunway Pyramid, Carnival and Putra Mall remained stable at 98.2%, 97.4% and 90.4% respectively (vs. 98.5%, 97.9% and 90.8% YoY).

• The hotel sector’s FY19 revenue and NPI slid by 5% and 8% to RM78.6mil and RM71.3mil respectively, mainly due to lower income in most of the hotel properties although mitigated by contribution of income guarantee from Sunway Clio Property.

• The office sector’s FY19 revenue and NPI expanded by 15% and 22% to RM38.4mil and 21.4mil respectively on the back of the improved performance from Sunway Putra Tower and Wisma Sunway, with the commencement of new tenants’ tenancy and expansion from existing ones, respectively.

• 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 has 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 - 9 Aug 2019