Highlights

Fine-tuning our forecasts. 9M net profit was slightly ahead of our estimates, making up 77.8% of our full year forecast. We now take the opportunity to fine tune our FY14 forecasts ahead of SREIT’s full year results which will be released next week.

Office segment adjustments. While we understand from management that our psf rental assumptions are on-track, we had not factored in the car park income. We have confirmed with management that our forecast deviations were due to car park income and we have made adjustment to our estimates accordingly for Menara Sunway and Sunway Tower. Note that SREIT does not provide breakdown of car park income for its portfolio assets.

Retail segment adjustments. Similarly, the deviation for the retail segment came from Sunway Carnival although our psf rental assumption is in-line with management’s guidance. Therefore, the deviations in gross rental income came from car park income, which we have also rectified accordingly.

Retail segment outlook remains steady. We continue to be positive on the outlook for the retail segment, which makes up circa 70% of gross revenue. In particular, Sunway Pyramid and Sunway Carnival have posted strong revenue growth YTD (+7.0% and +12.9% respectively) to help mitigate the loss of income from the closure of Sunway Putra Mall (SPM) in end April 2013 for major refurbishment. SREIT says SPM remains on-track to reopen in 3Q FY15. We previously imputed 6 months’ earnings contribution in FY15 from SPM but now impute 5 months, to be conservative.

Risks

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

Forecasts

We increase our FY14-16 forecast by 1.3-4.9% to factor in the revenue contribution from car park income, and estimate FY15 EPU growth to be 13.5% when SPM re-opens in 3Q FY15.

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 maintained at 6.5%, while TP is raised from RM1.26 to RM1.32. We maintain our neutral outlook on REITs given the likelihood of a further OPR rate hikes later this year.

Source: Hong Leong Investment Bank Research - 5 Aug 2014