Investment Highlights

• We maintain our BUY recommendation on Sunway REIT with an unchanged fair value of RM1.66/share. Our valuation for Sunway REIT is based on a target distribution yield of 5% over FY23F distribution income. No adjustment to our ESG scoring of 4 stars (Exhibit 11).

• We cut our FY22F distribution income by 18% to RM197mil (from RM241mil) but maintain that of FY23F. This is after factoring in a flattish rental reversion in FY22 as some tenants may still require rental support in the near term.

• Meanwhile, our FY24F distribution income has been increased by 7% to RM308mil. This is after factoring in higher occupancy and rental reversion rates on expectation of Covid-19 transitioning to an endemic phase and international borders to reopen by then.

• SREIT’s 18MFY21 distribution income of RM222mil was above both our and consensus expectations. It accounted for 119% of our full-year forecast of RM186mil and 111% of street estimates. The key variance to our projection was mainly due to higher than expected gross rental income.

• Sunway REIT’s gross revenue including unrealised rental income improved 48% QoQ to RM157.8mil in 6QFY21 from RM106.9mil in 5QFY21 driven largely by the retail and hotel segments (Exhibits 4 & 5). This was contributed by the pick-up in retail footfall following the full reopening of the economy and the year-end festive season. The realised distribution income to unitholders surged 88% QoQ to RM67.7mil (see Exhibit 1).

• Sunway REIT’s gross revenue and distribution income climbed 5% YoY and 65% YoY respectively to RM472.3mil and RM164.2mil respectively in 12MCY21 (vs. RM448.9mil and RM99.5mil in 12MCY20. The improved gross revenue and net profit were underpinned by higher rental income and lower finance cost (Exhibit 1).

• Sunway REIT declared 2.8 sen of distribution per unit (DPU) to unitholders in 6QFY21. This led to a total DPU of 6.1 sen for FY21. The DPU yield slid to 4.4% from 4.5% in FY20. The distribution frequency of Sunway REIT has been changed to a semi-annual basis with effect from 3QFY20.

• The net gearing ratio of Sunway REIT fell by 4%-point to 34% in 12MCY21 vs. 38% in 12MCY20. The ratio remained healthy at below the statutory threshold of 60%. However, the percentage of debt with a floating rate has increased to 62% in 6QFY21 from 56% in 2QFY21 (Exhibit 3).

• The occupancy rate for retail malls improved to above 90%, with Sunway Pyramid and Sunway Putra Mall staying consistent at 98% and 93% respectively (Exhibit 6). However, the occupancy rate for the hotel's segment dipped to below 43% in FY21, mainly due to the various MCOs and international travel restrictions.

• In the retail segment, tenancy expiries based on NLA in FY2022 are substantially high, accounting for 68%, 96%, and 83.9% for Sunway Pyramid Shopping Mall, Sunway Carnival Shopping Mall, and Sunway Clio Retail respectively. We expect the tenancy renewal rates to be high, with the assumption of no further lockdowns and well as the high demand of retail spaces in the these malls.

• Management has provided some updates during the analyst briefing last Friday. Here are the highlights:
  1. The expansion phase of Sunway Carnival Shopping Mall is scheduled to begin in the first week of April 2022. The expansion will add 350,000 sq. ft. of NLA to a total net lettable area of 838,395 sq. ft. Also, the mall is targeted to have an occupancy rate of 85% to 95% in FY2022.
  2. Sunway Resort Hotel will be partially open (with 180 guest rooms available for booking) from 1 March 2022 onward. It is expected to be fully reopened in 2H2022. The refurbishment of Sunway Resort Hotel will raise the total number of guest rooms from 442 to 462.
  3. Gordon Ramsay Bar & Grill, located at the lobby level of Sunway Resort Hotel, has received up to 10,000 bookings across a 6-month period.
  4. Management expects the rental assistance to stay put in 2022 but at a lower quantum than before as the economy has fully reopened. Certain tenants, especially those in travel-related businesses, will still require rental support in the near term.
  5. Rental reversion for the retail mall is anticipated to be flattish and/or at slightly lower mainly due to tenants still recovering from the previous MCOs.
  6. “Transcend 2027”, a revised version of its strategic roadmap “Transcend 2025”, will be released in the 2021 Annual Report.
  7. The company highlighted that it is now on the lookout for new assets in the industrial segment, which may help to cushion the potential impact of a future downturn. Specifically, industrial assets from industrial zones in Penang (island and mainland), Shah Alam, Johor and Klang Valley.
  8. Management is negotiating the rental of the Industrial property in Shah Alam 1.

• We remain positive on Sunway REIT’s long-term outlook, underpinned by: (i) its diversified investment portfolio which encompasses retail malls, hotels, offices, a university and hospitals that spread across Malaysia; (ii) strong occupancy rates which have exceeded 90% in retail assets; and (iii) profitable rental income generated from the services and industrial segments, which mitigate the downside risk of the hotel and retail segment.

• The downside risks are: (i) further negative yield spread against the 10 year MGS yield in a rising interest rate environment; (ii) lower-than-expected tenancy renewal rates; and (iii) the potential reintroduction of MCOs due to the spike in Covid-19 infection case which may result in lower occupancy rates for properties in the retail and hotel segments.

Source: AmInvest Research - 31 Jan 2022