Investment Highlights

• We maintain our BUY recommendation on Sunway REIT, with a lower fair value of RM1.64 (from RM1.94) based on an unchanged target yield of 5.5% over our revised FY22F distributable income.

• We cut our FY21F–23F distributable income by 41%, 16% and 13% to RM257.7mil, RM308.4mil and RM347.2mil respectively (from RM437mil, RM365.9mil and RM399.0mil) to largely reflect the lower-than-expected rental reversion, as well as the impact of the extended MCO 2.0 in 1QFY20F, which is likely lead to more rental rebates, followed by a slower recovery. Meanwhile, the hotel segment continued to experience pressure on the occupancy rate.

• Sunway REIT reported its 6MFY21 revenue and distributable income of RM203.2mil (-35% YoY) and RM57.8mil (-61% YoY) respectively, which came in below our forecasts and the consensus estimates, at 13% of our full-year 18-month forecasts (due to the change of its financial year-end) and 19% of the consensus full-year 12- month estimates (which have yet to be adjusted to the new financial year-end).

• The weaker revenue was mainly due to lower rental income from the retail and hotel segments with the reinstated CMCO during the quarter, and no income from Sunway Resort Hotel as the hotel was closed for phased refurbishment works since July 2020. Meanwhile, Sunway REIT’s 6MFY21 NPI and distributable income dropped by 43% and 61% to RM134.1mil and RM57.8mil respectively, in line with the lower revenue as mentioned above.

• The retail segment’s 6MFY21 revenue declined by 37% YoY to RM134.5mil (from RM212.3mil), while NPI contracted by 48% YoY to RM78.1mil (from RM149.3mil) mainly due to rental support for affected tenants and lower carpark income amidst the ongoing nationwide RMCO and CMCO in KL and Selangor since 14 October 2020.

• Meanwhile, the hotel segment’s 6MFY21 revenue dived by 77% YoY to RM10.7mil (from RM46.2mil), and NPI shrank by 82% YoY to RM7.8mil (from RM43.1mil) amidst a surge in Covid-19 cases nationwide and further restrictions on interstate, district and inbound travel, group and corporate events with the CMCO in KL and Selangor, as well as the closure of Sunway Resort Hotel for phased refurbishment of 12–24 months from July 2020.

• Sunway REIT proposed a distribution of 0.77 sen per unit for 2QFY21 compared with 2.45 sen per unit YoY. We lower our FY21F–23F distribution projection to 7.5 sen (18 months), 9.0 sen and 10.1 sen respectively, from 12.8 sen (18 months), 10.7 sen and 11.7 sen projected previously.

• Sunway REIT’s debt-to-asset ratio has eased slightly to 33% (vs. 38% previously) following its recent private placement exercise. We take comfort that it remains well below the regulatory threshold of 60% (temporarily raised from 50% up to 31 December 2022 by the Securities Commission, being a Covid-19 relief measure). As such, Sunway REIT does have some headroom to gear up for new acquisitions.

• We believe Sunway REIT’s long-term outlook remains positive given its diversified strategic asset portfolio (which includes retail malls, hotels, offices, university, hospital, etc.) backed by defensive tenants, and the large pipeline of potential assets for future injection. It is poised to benefit from the growth in Malaysia’s economy post-pandemic. We like Sunway REIT as a recovery play as well as a yield play, with attractive dividend yields of 5.3% for FY21 and more than 6% for FY22 and beyond amidst a low interest rate environment that is likely to be prolonged.

Source: AmInvest Research - 10 Feb 2021