Investment Highlights

• We maintain BUY on Sunway REIT (SREIT) with an unchanged fair value (FV) of RM1.87/unit based on ou dividend discount model (DDM), which incorporates a 4 star ESG rating . The FV implies a FY25F distribution yield of 6%, at parity to its 5-year median.

• We make no changes to earnings forecasts as SREIT’s 1QFY24 distributable income of RM87mil came in within expectations, accounting for 26% of our FY24F earnings and 24% of street’s.

• In 1QFY24, SREIT’s gross revenue fell 2% YoY while ne property income (NPI) dropped 6% YoY. Despite the improved performance of its retail, hotel and industria segments, 1QFY24 revenue and NPI were dragged by the absence of lease income from Sunway Medical Centre (Tower A & B) following their disposal at the end of Augus 2023, coupled with elevated marketing expenses for the retail segment.

• On QoQ comparison, SREIT’s 1QFY24 gross revenue declined 6% while NPI decreased 4%. This was mainly attributed to the recognition of unbilled lease income receivable in 4QFY23.

• Excluding the unbilled lease income receivable in 4QFY23 SREIT’s 1QFY24 NPI instead rose 5% QoQ due to improved performance in its retail, office and industrial segments.

• QoQ, overall average occupancy rate fell slightly to 80% in 1QFY24 from 82% in 4QFY23 .

• No income distribution has been declared in 1QFY24 due to its semi-annual distribution policy.

• For its retail malls, we foresee a positive rental reversion o 5% in FY24F. SREIT’s tenant sales in 1QFY24 exceeded pre pandemic levels (2019) on the back of sustained growth momentum in retail sales. Meanwhile, the recen introduction of EPF Account 3 offers flexibility for short term financial needs to members by allowing withdrawals at any time could stimulate consumer spending.

• Stronger tenant sales are anticipated to provide the group with the opportunity to negotiate for higher rentals in subsequent years.

• With the gradual recovery in Malaysia’s domestic travelling and influx of foreign tourists, we expect the average occupancy rate of the group’s hotel properties to furthe improve in FY24F and fully recover to pre-Covid levels in FY25F .

• We like SREIT for its well-diversified income base which could cushion potential downside risks from macro headwinds. Its portfolio encompasses retail malls, offices, hotels, universities and industrial properties across Malaysia. Also, the group is recognised for its environmental, social and governance (ESG) practices. Specifically, SREIT is the first amongst its local peers to incorporate sustainability financial considerations into its capital management strategies.

• SREIT currently trades at a compelling FY25F PE of 15x vs. its 4-year average PE of 20x. Meanwhile, FY25F distribution yield of 6.8% is attractive vs. current 10-year MGS yield of 3.85%. SREIT’s distribution yield spread of 2.95% against 10-year MGS vs. a pre-pandemic (2017-2019) median of 1% appeals to yield-seeking investors.

Source: AmInvest Research - 17 May 2024