Results

• Reported 1QFY17 gross revenue of RM128.88m (+6.3% yoy), translated into normalised net profit of RM65.82m (+10.5% yoy), accounting for 24.6% and 24.3% of HLIB and consensus forecasts, respectively.

Deviations

• None.

Dividends

• Proposed 1st interim dividend of 2.27 sen (1Q16: 2.12 sen), representing an annualized yield of 5.13%.

Highlights

• Yoy, revenue and net profit grew by 6.3% & 6.1% respectively attributable to strong performance from retail segment (+17.3% yoy at NPI) due to full contribution of Putra Mall (SPM) vs free rent period last year and reopening of the extra 16k sq ft of F&B area at Carnival Mall (SCM).

• Based on calendar year-to-date, encouraging sign of improved consumer spending seen from a 10% growth yoy in tenant sales at Sunway Pyramid Mall (SP).

• Improved performance from hotel segments (except Hotel Seberang Jaya) with higher occupancy rate. However income contracted by 21.5% yoy due to the loss of income from the Pyramid Hotel East (will be renamed as Sunway Pyramid Hotel, SPH), which is currently under refurbishment and is expected to be reopened progressively from 2QFY17.

• Lower revenue from office properties (-8.9% yoy) attributable to lower occupancy from all office properties due to non-renewal of tenants. Nonetheless, favourable update of securing tenants for Sunway Putra Tower to occupy 20% of NLA from 2Q onwards is welcomed in view of bleak outlook for overall office market.

• Qoq, net profit grew by 5.2% due to improved retail segment on the back of stronger consumer spending and reopening of F&B area at Carnival Mall; while hotel segment was strong on the back of improved occupancy from strong tourist arrival. However, office segment remained weak with lower occupancy rate due to non-renewal of tenants.

• For FY17, a dip/flat in DPU is expected given the loss of income from Pyramid Hotel and cessation of payment of manager’s fee in units. Besides, lower other income from one-off item involving court award of RM3.2m is likely to be recognized in FY17 (vs to RM6.2m recognized in FY16).

Risks

• Prolonged dampening of office market and consumer sentiment.

Forecasts

• Unchanged.

Rating

HOLD ↔, TP: RM1.66 ↔

• We like SREIT for its well-diversified portfolio in which the prominent assets are located at its unique township planning with large acquisition pipeline and strong backing from sponsor. However, FY17 will experience a dip/flat DPU following loss of income from SPH, slow growth in Sunway Putra and persistent weakness in office segment.

Valuation

• Maintain HOLD recommendation with unchanged TP of RM1.66 based on FY17 forecasted DPU of 9.1 sen.
• Targeted yield at 5.5% based on historical average yield spread of Sunway REIT and 10-year MGS.

Source: Hong Leong Investment Bank Research - 28 Oct 2016