Results

• 1HFY15 gross revenue of RM227.8m (+8.2% yoy) was translated into normalised net profit of RM126.7m (+7.9% yoy), accounting for 51.0% and 50.4% of HLIB and consensus FY forecasts, respectively.

Deviations

• Largely in-line

Dividends

• As expected, second interim dividend of 2.27 sen (1.90 sen taxable and 0.37 sen non-taxable) was declared during second quarter with ex-date on 12th Feb 2015.

• YTD dividend amounted to 4.55 sen per unit (FY14: 4.23 sen) accounting for 51.1% of our full year DPU assumptions.

Highlights

• Sunway Pyramid remain the biggest revenue contributor for S-REIT (61%) and recorded strong improvement in rental revenue driven by major tenancy renewal, additional income from Oasis Boulevard 5 as well as higher service and promotional charges recorded during the quarter.

• Hotel segment on the other hand recorded negative growth (-12.7% yoy) during the quarter (1Q15 +18.9% yoy) due closure of some F&B outlets for major refurbishment works, coupled with higher electricity, operating and general maintenance cost. Management also indicated that they are moving towards yield improvement strategy by benchmarking and targeting industry’s average revenue per available room.

• Likewise, office segment continues to contract at faster magnitude in 2Q15 (-5.3%) compared to preceding quarter (- 2.3%) primarily due to lower occupancy rate of 69.8% (1Q15: 87.3%). Together with sluggish outlook for office supply in Klang Valley, we remain cautious on the near term take up of vacant space at Sunway Tower.

• In a more positive note, we expect opening of new Sunway Putra Place in 4QFY15 will boost SREIT’s earnings in long term if not immediate term; create some excitement and thus potentially act as re-rating catalyst.

Risks

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

Forecasts

• We made changes in our forecasts to reflect the acquisitions of Sunway Hotel Georgetown and Wisma Sunway.
• Assuming five months revenue contribution for FY15 from Sunway Hotel Georgetown and nine months contribution for FY16 from Wisma Sunway; we revise our FY15, FY16 and FY17 DPU assumptions to 8.9 sen, 9.9 sen and 10.2 sen respectively (previously 8.7 sen, 9.5 sen and 9.7 sen).

Rating

HOLD , TP: RM1.60

• Posi tives: 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, which willtake time to change; persistent weakness in the office segment due to oversupply of new office space.

Valuation

• Maintain HOLD with a higher TP of RM1.60 (previously RM1.48) as we factor in the acquisitions of Sunway Hotel Georgetown and Wisma Sunway.
• Targeted yield maintained at 6.2% based on historical average yield spread of Sunway REIT and 7-year MGS.

Source: Hong Leong Investment Bank Research - 29 Jan 2015