Investment Highlights

• We maintain our HOLD recommendation on Sunway REIT with a lower FV of RM1.68 (from RM1.70 previously) based on a forward target yield of 6% following our earnings revision.

• We are revising our FY18-20 earnings downwards by 3.4%, 6.0% and 2.0% to RM288.9mil, RM296.9mil and RM310.2mil respectively with minor tweaks in operating expenses; and the refurbishment of Sunway Resort Hotel and Spa, which will impact its hospitality revenue mainly in FY19 and FY20. The refurbishment will be completed in 2020.

• Occupancy rates at Sunway Pyramid, Carnival and Putra Mall have remained stable at 99%, 97% and 90% respectively. Both Sunway Pyramid and Carnival have captive markets surrounded by mature townships, making them the leading malls in their locality, offering a wide array of retailers. Meanwhile, SunCity Ipoh Hypermarket is leased to a single tenant, a major hypermarket and retailer chain operating under the “Giant” brand.

• Following the refurbishment of Putra Mall in 2013-15, occupancy rate has been on an uptrend, growing from 60% (before refurbishment) to 90.5% presently. At the same time, it provides rental rebates to encourage both tenant retention and new occupancy.

• The hotel segment remains stable as all assets are currently on 10-year master leases. The refurbishment of Sunway Pyramid Hotel has been completed in June 2017; hence we expect full-year contribution from FY18 onwards. Meanwhile the latest acquisition, Sunway Clio Property, has started contributing in 3QFY18.

• Sunway REIT is still predominantly a retail REIT with c.70% contribution coming from its retail assets, and the balance from hotels (c.20%), and offices, hospitals and industrial assets (10%).

• Overall, we are NEUTRAL on the REIT sector over the next 12 months. Prospects for the sector are expected to be subdued, especially with potential OPR hikes in 2018 as well as muted rental reversion opportunities affected partly by the oversupply of retail and office spaces. However, we believe that Sunway REIT will fare slightly better.

Source: AmInvest Research - 5 Jul 2018