Results

• 1Q16 gross revenue of RM121.2m (+6.5% yoy, 5.5% qoq) was translated into normalised net profit of RM64.5m (+1.6% yoy), accounting for 23.2% and 23.0% of HLIB and consensus FY forecasts, respectively.

Deviations

• We consider this to be in-line as we expect gradual improvement in occupancy rate at Sunway Putra Mall.

Dividends

• Declared 1st interim dividend of 2.12 sen (1Q15: 2.28 sen).

Highlights

• Retail segment continued to dri ve S REIT’s earni ngs growth, primarily from resilient performanc e of Pyramid (+4.1%) and SunCity Ipoh (+0.0%) as well as improved performance of newly-opened Putra Mall (+1,746.4%). This has partially offset marginal decline in performance at Sunway Carnival (- 1.1% yoy).

• Despite having moderate growth, management remain cautious on retail outlook on the back of weak consumer sentiment and challenging operating environment for some retailers which could potentially dampened occupancy rates.

• Sequentially, occupancy for hotel segment has improved - notably at Sunway Resort Hotel & Spa and Sunway Putra Hotel. However, performance of Sunway Hotel Seberang Jaya has been lacklustre during the quarter owing to soft market demand and intense competition from new hotels.

• Data from Malaysian Association of Tour and Travel Agents shows that tourist arrival and outbound declined by -30% in 1H15 despite various measures introduced to encourage tourist arrival into Malaysia.

• Office segment still in red (Menara Sunway -2.4%, Sunway Tower -61.3%, Sunway Putra Tower -65.1%) primarily due to non-renewal by anchor tenants. This has been partially mitigated by contribution of newly-acquired Wisma Sunway (+100.0%).

• Management shared that office segment will remain a drag in FY16 due to high vacancy rate, anticipated longer time as well as increasingly high cost to secure new tenancies in an oversupply and weak market environment.

Risks

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

Forecasts

• Unchanged.

Rating

HOLD , TP: RM1.60

• 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, which will take time to change; persistent weakness in the office segment due to oversupply of new office space.

Valuation

• Maintain HOLD recommendation on the equity and unchanged TP of RM1.60.
• Targeted yield at 6.2% based on historical average yield spread of Sunway REIT and 7-year MGS.

Source: Hong Leong Investment Bank Research - 30 Oct 2015