Sunway REIT’s (SREIT) 4QFY20 realised net profit came in weaker than expected at RM21.9m (-67.4% YoY, -63.9% QOQ). In FY20, the Group registered RM228.4m (-19.1% YoY) which only constituted c.87% of our and consensus full year estimates. The weak performance was mainly due to the adverse impact of pandemic-induced Movement Control Orders (MCO) on its retail and hotel segments. As reported earlier, its business activities were limited to the provision of essential products and services during MCO, while majority of non-essential tenants were not in operation which resulted in substantial rental support granted during the MCO period in order to ensure survivability of these tenants. As such, the retail segment’s revenue and NPI shrunk by 48.9% and 58.4% respectively in 4Q FY2020. We understand that economic activities have progressively resumed during the Recovery Movement Control Order (RMCO) and recovery in footfall has been encouraging, albeit at a gradual pace. All told, we cut our FY21/22 net profit by -16%/-9% to account for the longer than expected retail recovery. Maintain Neutral call with a revised RM1.65 TP (from RM1.70) after the earnings adjustments.

• Retail assets’ revenue almost halved YoY. Revenue from retail assets dropped 48.9% YoY to RM54.1m mainly due to rental support to assist tenants affected by restrictions and loss of business during the MCO, CMCO and RMCO effected by the Government, as well as lower carpark income. Net property income (NPI) correspondingly recorded a reduction of 58.4% or RM45.1m compared to 4QFY19.
• Hotel’s gross revenue also halved. The hotel segment recorded gross revenue of RM7.0m for 4QFY20 or a drop of 53.3% YoY attributed to loss of business from restrictions on domestic and inbound travel, group and corporate events, as well as lease rebate provided to lessees and tenants in 4QYF20. NPI correspondingly recorded a reduction of 57.8% YoY or RM7.7m.
• Office segment holding well with the segment recording gross revenue of RM10.4m for 4QFY20, an increase of 3.9%, mainly contributed by overall improved performance from all office properties. NPI recorded an increase of 10.0% YoY mainly due to MCO utilities savings, while Menara Sunway had also incurred higher maintenance expenses in 4QFY19. Separately, the services segment contributed revenue and NPI of RM14.9m for 4QFY20, an increase of RM1.7m YoY, mainly due to full income contribution of Sunway University & College campus, as well as 3.5% positive rental reversion of Sunway Medical Centre.

Source: PublicInvest Research - 4 Aug 2020