Investment Highlights

• We maintain BUY on Sunway REIT (SREIT) with an unchanged fair value (FV) of RM1.88/unit based on our dividend discount model (DDM), which incorporates a 3% premium for a 4-star ESG rating . The FV implies FY25F distribution yield of 5.6%, at parity to its 5-year median.

• We make no changes to our earnings forecasts as SREIT’s 1HFY24 distributable income of RM165mil came in within expectations, accounting for 49% of our FY24F earnings and 46% of street’s.

• SREIT declared a 2QFY24 gross distribution per unit (DPU) of 4.66 sen (+0.9% YoY), in line with our FY24F distribution of 9.9 sen.

• In 1HFY24, SREIT’s gross revenue increased 1.4% YoY while net property income (NPI) improved 2.1% YoY. This was mainly attributed to stronger revenue from the retail segment, supported by:
  
  i) the inclusion of rental income from 6 Giant hypermarkets that commenced contribution on 30 April 2024,
  
  ii) better performance from Sunway Carnival Mall despite ongoing asset enhancement initiatives (AEI), and
  
  iii) higher rental from Sunway Resort Hotel. This was partly offset by the absence of Sunway Medical Centre’s Towers A & B, which was disosed on 30 August 2023.
   
• On QoQ comparison, SREIT’s 2QFY24 gross revenue decreased by 1.7% as NPI decreased 1%. This decline was primarily due to the ongoing AEI at the Oasis section of Sunway Pyramid Mall, which slightly impacted overall revenue. The AEI is expected to be completed with the section to reopen by November 2024.

• QoQ, overall average occupancy rate improved slightly to 81% in 2QFY24 from 80% in 1QFY24 .

• With Malaysia’s domestic travel gradually recovering amid an influx of foreign tourists, predominantly from China and India, SREIT’s hotel segment saw a QoQ improvement in gross revenue by 4% as NPI increased by 2%. This is mainly attributed to higher occupancy rates at Sunway Resort Hotel and Sunway Pyramid Hotel . We anticipate that the average occupancy rate for the group’s hotel properties will continue to improve in 2HFY24, reaching pre-pandemic levels by FY25.

• We continue to see challenges from SREIT’s office segment, especially for Sunway Tower and Sunway Putra Tower, which obtained lower occupancy rates. Hence, the office segment’s NPI was flat QoQ at RM13mil despite full occupancy rates for Wisma Sunway and The Pinnacle Sunway.

• The REIT is currently looking at acquisitive yield-accretive growth, largely from third parties as underscored by the coming completion of the purchase of a 7-storey retail shopping centre called 163 Retail Park for RM215mil by 3QFY24 and Kluang Mall for RM158mil by 4QFY24, which could marginally raise its FY24F debt-asset ratio from 39.7% to a still-comfortable 41.9% vs. SC’s ceiling of 50%.

• 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 6.5% is attractive vs. current 10-year MGS yield of 3.77%. SREIT’s distribution yield spread of 2.63% against 10-year MGS vs. a pre-pandemic (2017-2019) median of 1% appeals to yield-seeking investors .

Source: AmInvest Research - 16 Aug 2024