Sunway REIT (SREIT) delivered better than expected earnings performance again in 1QFY22 with realised net profit of RM83.1m (no comparative quarter due to change of FY) which beat both our and consensus expectations at c.33% and c.32% of respective full year profit forecasts. The profit disparity is mainly attributed to better-than-expected performance from the retail segment which benefitted from pent-up demand and festive season that boosted the recovery of retail footfall to pre-pandemic levels, as well as marginal rental support compared to the similar period a year ago. As such, we adjust our FY22/FY23/FY24 earnings upwards by 18%/15%/9% respectively to account for higher margins. With the stock price nearing our TP, we downgrade SREIT to Neutral from Outperform with TP unchanged at RM1.55 as we believe the stock is fairly valued now given the narrowing spreads due with expectation of more rate hikes to rein in inflationary pressure.

• Retail revenue jumped 83% to RM98.4m in 1QFY22 mainly due to the overall improved performance across retail properties, primarily contributed by Sunway Pyramid Mall which has doubled its revenue to RM77.6m during the quarter. We understand that the improved performance of the retail properties was supported by the encouraging tenant sales in conjunction with the strong pent-up demand, festive spending and relaxation of COVID- 19 safety measures, resulting in an improved retail footfall during the period and lower rental support as compared to the similar period a year ago. Net property income (NPI) jumped 193.5% YoY for the quarter under review to RM70.3m.

• Hotel segment continued to show improvements. The hotel segment recorded gross revenue of RM18.5m in 1QFY22 (+29% YoY) mainly due to improved occupancy with the increased domestic leisure and business travel and MICE activities during NRP Phase 4 in 1QFY22 compared to MCO 2.0 a year ago. We understand that all hotels in the portfolio delivered better performance except Sunway Resort Hotel which remained close for refurbishment since July 2020. Sunway Resort Hotel has commenced its first phase of operations in May 2022. NPI for the hotel segment rose 36% YoY to RM17.4m in 1QFY22.

• Office segment remains steady. Group office segment revenue rose marginally by 1% YoY to RM19.4m, mainly driven by improved performance from Menara Sunway, Sunway Putra Tower and The Pinnacle Sunway. These assets continued to deliver steady rental income supported by commencement of new tenants and stable occupancy rate.

Source: PublicInvest Research - 19 May 2022