Investment Highlights

• We maintain our BUY recommendation with a reduced fair value of RM1.66/share (from RM1.81/share previously) for Sunway REIT, based on an unchanged target yield of 5% to a 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 6).

• We cut our distributable income by 10% for FY21F, 9% for FY22F and 8% for FY23F to largely reflect higher-thanexpected rental rebates given the remaining high Covid-19 cases locally which are likely to delay traffic recovery at the retail malls. Meanwhile, the hotel segment continued to experience pressure on occupancy rates.

• Sunway REIT’s 12MFY21 distributable income of RM118mil (-48% YoY) came in below our and consensus’ estimates, accounting for only 64% of our earlier 18MFY21F net profit (due to the change of financial yearend) and 46% of the consensus estimate.

• The group’s 12MFY21 revenue dropped by 26% YoY to RM411mil mainly due to lower rental income from the retail and hotel segments that were dampened by the various MCOs during the financial period, and negligible income from Sunway Resort Hotel which has been closed for phased refurbishment works since July 2020. This is partially offset by income from the newly acquired The Pinnacle Sunway in November 2020.

• The lower revenue caused Sunway REIT’s 12MFY21 NPI to drop by 26% YoY to RM264mil and distributable income by 48% YoY to RM118mil.

• The retail segment’s 12MFY21 revenue declined by 32% YoY to RM247mil (from RM365mil), while NPI contracted by 49% YoY to RM128mil (from RM249mil) due to rental support for affected tenants and lower carpark income amidst the various MCOs during the financial period.

• Meanwhile, the hotel segment’s 12MFY21 revenue dived by 51% YoY to RM34mil (from RM69mil), and NPI shrank by 56% YoY to RM28mil (from RM62mil) amidst the resurgence of Covid-19 cases nationwide which caused further restrictions on travel and group/corporate events, as well as the closure of Sunway Resort Hotel for phased refurbishment over 12–24 months from July 2020.

• On a positive note, Sunway REIT's office segment’s 12MFY21 revenue rose by 53% YoY to RM64mil (from RM42mil), and NPI surged by 73% YoY to RM42mil (from RM24.0mil) thanks to the maiden contribution of RM22mil from The Pinnacle Sunway, which was acquired on 20 November 2020.
   
• Reflecting the lower results, Sunway REIT's 12MFY21 proposed distribution income declined by 50% YoY to 3.3 sen per unit (compared with 7.3 sen per unit in FY20). It is now only making income distribution on a semi-annual basis effective CY2020 vs. quarterly previously. Hence, our distribution projections have been lowered to 5 sen from 5.6 sen for 18MFY21F, 7 sen from 7.7 sen for FY22F and 8 sen from 8.8 sen for FY23F.
   
• On a QoQ comparison, Sunway REIT's 4QFY21 revenue was flattish at RM103mil. However, its 4QFY21 NPI contracted by 7% QoQ to RM62mil, mainly due to the higher other property operating income (attributed to provision for doubtful debts) as well as quit rent, assessment and insurance cost. Its distributable income contracted by 10% QoQ to RM29mil, largely attributed to higher other trust expenses.

• Sunway REIT’s debt-to-asset ratio has eased to 33% (vs. 40% in FY20) 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. The company highlighted that it is now on the lookout for new assets and does not rule out potential near-term acquisitions with the emergence of yield-accretive assets.

• 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 4.9% for FY22F and 5.7% for FY23F amid a low interest rate environment that is likely to be prolonged.

Source: AmInvest Research - 1 Sept 2021