Results

4Q14 core PAT rose 1.1% yoy to RM56.1m, with YTD net profit of RM232m making up 97.8% and 101% of HLIB and consensus estimates respectively.

Deviations

None.

DPU

2.03 sen DPU was declared in 4Q14, bringing YTD DPU to 7.44 sen, or 87% of our 8.56 sen FY14E DPU forecast.

Highlights

Flattish rental income growth. Rental income was up 5.2% yoy but only 0.6% qoq, underpinned by healthy growth from the retail segment.

Retail segment remains steady. The retail segment rose 10.0% yoy and 0.6% qoq, as strong rental reversions for both Sunway Pyramid and Sunway Carnival (+11.3% yoy and +11.5% yoy, respectively) helped to mitigate the loss of income from the closure of Sunway Putra Mall (SPM) in end April 2013 for major refurbishment. In FY14, Sunway Pyramid saw 1.03m sft (or 60%) of its retail space renewed/replaced with double digit rental reversion.

Office segment: flat yoy. While Menara Sunway and Sunway Putra Tower registered strong rental income growth of 5.1% and 13.3% yoy respectively, this was partially offset by weak occupancy and rental income for Sunway Tower, which saw 72k sft (or 27%) of NLA vacated by the departure of an anchor tenant in 4Q.

Hotel segment continues to be choppy. It was a bad quarter for the hotel segment revenue (-11.9% yoy), which management attributes to seasonal weakness in 4Q, as well as Sunway Putra Hotel being affected by the refurbishment for Sunway Putra Mall (SPM).

Updates on SPM. The mall remains on-track to reopen in early 2015, with tenants already secured for circa 60% of NLA at RM6-7 psf. SREIT is targeting for 70% occupancy rate upon opening.

Risks

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

Forecasts

FY15-17 forecast reduced by 0.3-1.9% after fine-tuning our occupancy rate assumptions for SPM.

Rating

HOLD

Positives: Has the largest acquisition pipeline amongst M-REITs; strong backing from Sponsor; welldiversified across various segments with low tenant concentration; and 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 maintained at RM1.32. We maintain our neutral outlook on REITs in view of the likelihood of a further OPR rate hikes later this year.

Source:Hong Leong Investment Bank Research - 12 Aug 2014