Results

1Q14 core PAT rose 6.5% yoy to RM55.4m, making up 25% and 24% of HLIB and consensus estimates respectively.

Deviations

None.

DPU

2 sen DPU was declared in 1Q14, or 24% of our 8.3 sen FY14E DPU forecast.

Highlights

Mixed bag of results. 1Q rental income was flat yoy and softened 3.4% qoq, while income from the retail and office segments was stable, hotel earnings continue to be volatile. Overall, the portfolio enjoyed a healthy rental reversion of 14.2% in 1Q.

Retail segment flat. This segment was flat due to: (1) The closure of Sunway Putra Mall (SPM) in end April 2013 for major refurbishment. SPM remains on track to complete refurbishment by Feb 2015; and (2) Sunway Pyramid Shopping Mall had a relatively modest rental reversion of 14.4% in 1Q FY14, vs. 18.1% in the previous quarter.

Choppy times for hotel segment, but office segment has stabilised. We now impute lower occupancy rates and earnings from the hotel segment?, given that SREIT’s hotels in Bandar Sunway predominantly rely on the corporate market, which has been affected by the soft macro conditions

Guiding for softer DPU. While we believe SREIT should be able to maintain its net profit in FY14, we believe DPU will decline in FY14 given the combined effects of (1) Weaker outlook for the hotel segment; and (2) High share base from the unit placement done in 3Q FY13.

Risks

Highly reliant on Sunway Pyramid; intensifying competition for assets and tenants.

Forecasts

FY14-16 net profit forecasts reduced by 5.4-6.5% on account of reduced earnings projections from the hotel segment. Our DPU assumption for FY14 has also been reduced by 5.3% to 8.16 sen per unit.

Rating

HOLD

Positives: Has the largest acquisition pipeline amongst M-REITs; strong backing from Sponsor; welldiversified across various segments with low tenant concentration; synergy with Sponsor’s townships.

Negatives: Still heavily reliant on Bandar Sunway, which will take time to change; persistent weakness in the office segment due to oversupply of new office space; choppy performance in the hotel segment.

Valuation

Target DY maintain at 6.5%, due to the performance drag from its hotel assets. TP reduced from RM1.33 to RM1.26 due to the cut in our DPU forecasts. HOLD.

Source: Hong Leong Investment Bank Research - 30 Oct 2013