Results

• 9MFY16 gross revenue of RM383.43m (+13.3% yoy) was translated into normalised net profit of RM200.8m (+9.4% yoy), accounting for 77.8% and 76.8% of HLIB and consensus forecasts, respectively.

Deviations

• None.

Dividends

• Proposed 3rd interim dividend of 2.37 sen (3Q15: 2.13 sen); YTD dividend at 7.06 sen vs our full year DPU at 9 sen.

Highlights

• Strong performance from retail (+15.7% yoy), particularly SP (+6.6% yoy) and Sunway Carnival (SC) (+9.4%) due to higher variable rent given the festive seasons but was partially offset by reconfiguration works into F&B area, which affected 4% of NLA at SC.

• Higher revenue (+34.7% yoy) from all hotels (except Hotel Seberang Jaya) with higher leisure visitors and aggressive marketing strategy with online travel agency; partially offset by loss of income on the RM123m refurbishment exercise of Pyramid Hotel East (PHE), which is fully closed now. It is worth noting that the newly opened Pyramid Hotel West by its sponsor is likely to cannibalize sales from the Sunway Resorts Hotel going forward.

• Office segment (-18.8% yoy) remains challenging for both lowly occupied Sunway and Sunway Putra towers. Besides, a non-renewal (16% of NLA) of a tenant at Menara Sunway reduced the revenue by RM0.9m while new tenants secured to assume 11% of the NLA was at a slightly lower market rate. Overall office port folio was partially mitigated by contribution of newly-acquired Wisma Sunway.

• Lower rental renewals is expected for upcoming major renewals in FY17 (57% & 51% of NLA for SP & CM) as it involves anchor tenants with capped reversion rate and given overall cautious operating environment.

• Management guided modest DPU growth for FY16 given the better than expected performance from its hotel operation and new income from the refurbishment and newly acquired properties despite a loss of income from PHE.

Risks

• Income reliant on a one single asset in Sunway Pyramid.
• Prolonged dampening of office market.
• Intensifying competition for assets and tenants.

Forecasts

• We factor in one-off court award from last quarter into other income resulting marginally higher DPU for FY16.

Rating

HOLD , TP: RM1.58

• 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 with unchanged TP of RM1.58 based on FY17 forecasted DPU.
• Targeted yield at 6.0% based on historical average yield spread of Sunway REIT and 10-year MGS.

Source: Hong Leong Investment Bank Research - 28 Apr 2016