Sunway REIT (SREIT) delivered a better than expected earnings performance in 6QFY21 (18-month FY21) with realised net profit of RM67.6m, bringing YTD realised net profit to RM221.9m which surpassed our estimates, though falling below consensus. Group FY21 realised net profit constitutes ~106% and ~92% of our and consensus full financial year (18-month) estimates. To recap, the current cumulative financial period is a period of 18 months from 1 Jul 2020 to 31 Dec 2021. As such, there are no comparative figures for the preceding year’s corresponding period. FY21 gross revenue rose 64.8% YoY mainly contributed by higher gross revenue from all segments and recognition of unrealised unbilled lease income receivable. We understand that retail footfall and retail sales for SREIT have returned to 100% normalcy towards the end of 2021. All told, FY22/FY23 earnings are adjusted marginally upwards by 2%/1% respectively. With the recent price weakness, stock price now is offering a decent upside and as such, we upgrade SREIT to Outperform from Neutral with TP unchanged at RM1.55 as we believe share price should react positively to the strong financial performance. While we are also positive on the nascent recovery of the Group’s earnings, recent spike in pandemic cases is still a concern albeit the high vaccination rate in the country.

• Retail segment’s realised gross revenue rose 63% YoY to RM92.4m mainly due to lower rental support and higher rental and carpark income during National Recovery Plan (NRP) in 6QFY21 compared to recovery movement control order (RMCO) and conditional movement control order (CMCO) in 2QFY21. Net property income (NPI) correspondingly increased by 94% to RM65.8m YoY. We understand that the improved financial performance was also attributed to encouraging recovery in the retail footfall and retail sales pursuant to the easing of movement restrictions compared to operating under the CMCO in the same period last year. In 6QFY21, retail footfall and retail sales have returned to normalcy.

• Hotel also seeing some improvements. The hotel segment recorded gross revenue RM9.8m in 6QFY21, an increase of 24.0% YoY mainly attributed to the lifting of inter-state travelling restrictions and gradual resumption of meetings, incentives, conferences and exhibitions (MICE). Correspondingly, NPI for the hotel segment rose 28.3% YoY to RM8.5m.

• Office contribution higher due to new asset. Group office segment revenue rose 31.4% to RM19.1 million in 6QFY21 and NPI improved 38.2% to RM12.4mYoY as the business segment boosted by full income contribution from The Pinnacle Sunway and largely stable average occupancy rate across all office properties in Sunway REIT’s asset portfolio.

Source: PublicInvest Research - 31 Jan 2022