Results

• 1HFY16 gross revenue of RM253.08m (+11.1% yoy) was translated into normalised net profit of RM136.0m (+7.33% yoy), accounting for 49.5% and 49.8% of HLIB and consensus forecasts, respectively.

Deviations

• In-line.

Dividends

• Declared 2nd interim dividend of 2.57 sen (2Q15: 2.27 sen); YTD dividend at 4.69 sen, representing a yield of 6.3%.

Highlights

• Strong performance from retail (+14% yoy) and hotel segments (+23% yoy), with higher contribution from Putra Mall and full contribution from Sunway Hotel Georgetown, partially offset by decline in performance at Carnival Mall (CM) (-1.1% yoy) due to reconfiguration works affecting 4% of NLA (21k sqft), which will be completed by 4QFY16.

• Higher income from Sunway Resort Hotel & Spa (+23% yoy) and Sunway Putra Hotel (+50% yoy) with higher visitors from Middle Eastern and competitive pricing strategy, offset by lower performance of Sunway Hotel Seberang Jaya due to soft market demand and intense competition.

• Lacklustre performance from office segment (-27% yoy) primarily caused by non-renewal of anchor tenants from Sunway Tower and Sunway Putra Tower with occupancy rate slumping below 30%. This was partially mitigated by contribution of newly-acquired Wisma Sunway.

• Occupancy rate and rental reversions remained healthy for Pyramid Mall (6-9%) and Carnival Mall (12-15%) and growth is expected from upcoming major renewals for Pyramid (57% of NLA in FY17) and (24% & 51% of NLA in FY16 & FY17) for CM as retail demand for these malls are still intact.

• Major AEI planned on the refurbishment of Pyramid Tower East (PTE) in 2HFY16 a full closure is expected by 4QFY16 for a period of 12m with a planned capex of circa RM100m.

• Management guided flattish DPU for FY16 as office segment will remain a drag with higher vacancy rate in an oversupply and weak market environment. It also anticipated a loss of income from Pyramid Tower East.

Risks

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

Forecasts

• We lower our earnings forecast for FY16 by 3% mainly taking into account for the loss of income from Pyramid Tower East and prolonged low occupancy rate for offices.

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 BUY recommendation with higher TP of RM1.60 as we roll over our valuation to FY17.
• Targeted yield at 6.3% based on historical average yield spread of Sunway REIT and 10-year MGS.

Source: Hong Leong Investment Bank Research - 28 Jan 2016