Investment Highlights

• We maintain our BUY recommendation, forecasts and fair value of RM1.66/share for Sunway REIT, based on an unchanged target yield of 5% to 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).

• Sunway REIT’s 15MFY21 distributable income of RM154mil (-39% YoY) came in within our forecasts but below the consensus’ estimates, accounting for 83% of our 18MFY21F forecasts (due to the change of financial year-end), but only 77% of the consensus estimate.

• The group’s 15MFY21 revenue dropped by 22% YoY to RM518mil mainly due to lower rental income from the retail and hotel segments that were dampened by the various movement control orders (MCOs) during the financial period, exacerbated by negligible income from Sunway Resort Hotel which has been closed for phased refurbishment works since July 2020. This was partially offset by income from newly acquired The Pinnacle Sunway on 20 November 2020.

• The lower revenue caused Sunway REIT’s 15MFY21 net property income (NPI) to drop by 11% YoY to RM334mil and distributable income by 39% YoY to RM154mil.

• The retail segment’s 15MFY21 revenue declined by 30% YoY to RM312mil (from RM442mil), while NPI contracted by 44% YoY to RM164mil (from RM293mil) due to rental support for affected tenants and lower carpark income amidst the various MCOs during the financial period.

• Likewise, the hotel segment’s 15MFY21 revenue dived by 44% YoY to RM40mil (from RM71mil), and NPI shrank by 50% YoY to RM32mil (from RM64mil) amidst the resurgence of Covid-19 cases nationwide during the period, which caused further restrictions on travel and group/corporate events, as well as the closure of Sunway Resort Hotel.

• On a positive note, the office segment’s 15MFY21 revenue rose by 58% YoY to RM83mil (from RM52mil), and NPI surged by 80% YoY to RM54mil (from RM30mil) thanks to The Pinnacle Sunway’s maiden contribution.

• Given the lower results, Sunway REIT's 15MFY21 proposed distribution declined by 66% YoY to 3.3 sen per unit (compared with 9.7 sen per unit in 15FY20). This is also partly attributed to distribution policy being on a semi-annual basis effective CY2020 vs. quarterly previously. Even so, our distribution projections of 5 sen for 18MFY21F, 7 sen for FY22F and 8 sen for FY23F remain on track.

Source: AmInvest Research - 10 Nov 2021