Results

1QFY15  core  net  profit  of  RM63.5m  (+14.5%  yoy)  came  in slightly  above  our  expectation  but  in-line  with  consens us, accounting for 26.3% and 25.1% of HLIB and consensus  full year  estimates,  respectively.

Dividends

Dividend  of  2.28  sen  was  declared  during  the  quarter, accounting  for  26.3%  and  26.5%  HLIB  and  consensus  full year  DPU projections, respectively.

Highlights 

Retail segment  gross  revenue jumped by +15.6%  yoy…   Positive  contribution  from  Sunway  Pyramid  Shopping Mall  (+ 14.6%  yoy),  Sunway  Carnival  Shopping  Mall (+23.8%  yoy)  and  Sunway  Ipoh  Hypermarket  (+10.0%) mainly due to major renewal  / new tenancies.   Management indicated that new supply of shopping mall will not affect its portfolio  except for Sunway Putra  Mall where  Quill City Mall will be opening  nearby.

Robust  revenue   growth in hotel segment (+18.9%  yoy)…   Positive  contribution  from  Sunway  Resort  Hotel  &  Spa (+34.1%  yoy),  Pyramid  Tower  Hotel  (+7.6%  yoy)  and Sunway  Hotel  Seberang  Jaya  (+28.5%  yoy)  due  to improvement  in daily average  rate and occupancy rate.   Sunway  Putra  Hotel’s  performance  continues  to  drag with  average  occupancy  rate  dropp ed  to  36.4% (previously  43.8% ).  We  understand  that  the  completion of  refurbishment  works  is  on  track  (1QCY15)  and  full contribution  can be recognised  in 2QCY15.     We  opined  that  hotel  segment  will  continue  to  grow further  given  higher  tourist  arrival  in  7 -month  CY14 (+9.7% yoy).

Minimal  growth from office segment (+2.3%  yoy)…   Single  digit  growth  from  Menara  Sunway  (+4.0%  yoy) due  to  moderate  increase  in  average  rental  rate  while revenue  from  Sunway  Putra  Tower  inc reas ed  +5.9% yoy  as a result of slightly higher  occupancy rate.   We remain cautious on the office segment given anchor tenants for Sunway Tower and Sunway Putra Tower will surrender  their  office  spaces  which  will  see  occupancy rate  drop  to  50%  and  30%  respectively  by  end December  2014.

Risks

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

Rating

HOLD, TP: RM1.48

Positives :  Has the largest acquisition pipeline  amongst MREITs; strong backing from Sponsor; well- diversified across various  segments  with  low  tenant  concentration;  and synergy with Sponsor’s townships.  

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

Valuation

• We maintain  TP of  RM1.48  and  HOLD  recommendation  on the stock.
• Targeted  yield remains at 6.4% based on historical  average yield spread  of Sunway   REIT  and 7-year MGS.

Source: Hong Leong Investment Bank Research - 7 Nov 2014