Investment Highlights

• We maintain our BUY recommendation and fair value of RM1.64 for Sunway REIT, based on an unchanged target yield of 5.5% to a rolled-forward and revised FY23F distributable income. Our fair value is adjusted for a 3% premium to reflect a 4-star ESG rating as appraised by us (Exhibit 4).

• We cut our FY21F–23F distributable income by 20%, 14% and 13% to RM206.2mil, RM264.3mil and RM300.5mil respectively (from RM257.7mil, RM308.4mil and RM347.2mil) to largely reflect higher-than-expected rental rebates, as well as the impact of the extended MCO 3.0 in 4QFY21F, which is likely lead to more rental rebates, followed by a slower recovery. Meanwhile, the hotel segment continued to experience pressure on occupancy rates.

• Sunway REIT reported its 9MFY21 revenue and distributable income of RM307.5mil (-32% YoY) and RM89.7mil (-57% YoY) respectively. These came in below our and consensus’ estimates, accounting for 35% of our earlier 18MFY21F net profit (due to the change of its financial year-end) and 30% of the consensus estimate.

• The weaker YoY revenue was mainly due to lower rental income from the retail and hotel segments due to the various MCOs during the financial period, and negligible income from Sunway Resort Hotel as the hotel has been closed for phased refurbishment works since July 2020. The lower revenue caused Sunway REIT’s 9MFY21 NPI and distributable income to drop by 41% YoY to RM201.1mil and 57% YoY to RM89.7mil respectively.

• The retail segment’s 9MFY21 revenue declined by 39% YoY to RM188.2mil (from RM310.6mil), while NPI contracted by 53% YoY to RM102mil (from RM216.4mil) mainly due to rental support for affected tenants and lower carpark income amidst the nationwide CMCO and MCO implemented during the financial period.

• Meanwhile, the hotel segment’s 9MFY21 revenue dived by 59% YoY to RM25.1mil (from RM61.5mil), and NPI shrank by 64% YoY to RM20.6mil (from RM56.6mil) amidst a surge in Covid-19 cases nationwide and further restrictions on travel and group and corporate events, as well as the closure of Sunway Resort Hotel for its phased refurbishment of 12–24 months from July 2020.

• On a positive note, Sunway REIT's office segment’s 9MFY21 revenue improved by 42% YoY to RM44.3mil (from RM31.3mil), and NPI surged by 63% YoY to RM28.6mil (from RM17.6mil) thanks to the income contribution by The Pinnacle Sunway of RM13.1mil, acquired on 20 November 2020.

• Reflecting the lower results, Sunway REIT's 9MFY21 proposed distribution income declined by 66% YoY to 1.7 sen per unit (compared with 5.0 sen per unit in 9MFY20). It is now only making income distribution on a semi-annual basis effective CY2020. We lower our FY21F–23F distribution projection to 5.6 sen (18 months), 7.7 sen and 8.8 sen respectively, from 7.5 sen (18 months), 9.0 sen and 10.1 sen projected previously.

• On a QoQ comparison, Sunway REIT's revenue has increased by 9% QoQ from the guaranteed income received from Sunway Clio Property and Sunway Hotel Georgetown, coupled with the full quarterly income contribution by The Pinnacle Sunway.

• However, its 3QFY21 NPI has only improved by 2% QoQ to RM67.0mil, partly offset by the adverse impact on retail segment following the reimplementation of the MCO during the quarter. Its distributable income climbed by 12% QoQ to RM31.9mil, contributed by the lower other trust expenses and finance costs due to the absence of one-off professional fees for The Pinnacle Sunway acquisition and consent fee for borrowing facilities incurred in 2QFY21, as well as the lower average interest rate in 3QFY21 of 2.8% vs. 2.9% in 2QFY21.

• Sunway REIT’s debt-to-asset ratio has eased to 22% (vs. 37% previously) following its recent private placement exercise. We take comfort that this remains well below the regulatory threshold of 60% (temporarily raised from 50% until 31 December 2022 by the Securities Commission for Covid-19 relief). 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 and hospital) 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-cum-yield play, with attractive dividend yields of 4.2% for FY21F and over 5.0% for FY22F and beyond amid a low interest rate environment that is likely to be prolonged.

Source: AmInvest Research - 20 May 2021