Results

• Reported 1HFY17 gross revenue of RM255.8m (+1.1% yoy) which translated into normalised net profit of RM127.2m (+0.7% yoy), accounting for 47.5% and 46.1% of HLIB and consensus forecasts, respectively.

Deviations

• Within expectations as we expect better performance in 2H.

Dividends

• Declared 2 nd interim dividend of 2.28 sen (2QFY16: 2.57 sen), going ex on 27 Feb, bringing YTD dividend to 4.55 sen (FY17: 4.69 sen), representing an annualized yield of 5.1%.

Highlights

• YoY: Revenue and net profit for 2QFY17 contracted by 3.8% and 1.6% respectively due to the closure of Sunway Pyramid Hotel (SPH) and weaker performance in Sunway Resort Hotel & Spa (SRHS), affected by lower occupancy, but partly mitigated by better performance from other segments.

• Higher NPI from retail (+5.1%) was driven by Sunway Pyramid (SP) on the back of higher base rent from rental reversion and lower opex. However, it was offset by lower income from Sunway Putra Mall (SPM) due to rebates granted to struggling tenants during the quarter. To note, SP’s 10% yoy tenant sales growth in CY16 signified improved consumer spending while rental reversions were achieved at circa. 4-7%.

• Improvement in office segment’s NPI (+6.2% yoy) is attributable to higher occupancy from Sunway Tower (ST) and Sunway Putra Tower (SPT) upon securing new tenants. Nevertheless, this was offset by non-renewal of tenants affecting both Menara Sunway (MS) (5% of NLA) and Wisma Sunway (WS) (5% of NLA).

• QoQ : Net profit contracted by 6.8% due to lower contribution from Sunway Carnival Mall (SCM) resulting from reversal of deterrent fee despite additional NLA from F&B area. Besides, weak performance from SRHS compounded the drop on the back of soft market conditions as well as high base in 1QFY17.

• YTD : Similar trend and reasons observed for all the segments except for office in which the NPI was down by 1.7% due to non-renewal of tenant at MS and ST, mitigated by higher contribution from SPT.

• Management expects resilient performance from retail segment and improvement in office segment while anticipating challenges in hotel segment.

Risks

• Prolonged office market and consumer’s dampened sentiment.

Forecasts

• Unchanged.

Rating

HOLD ↔ , TP: RM1.70 ↔

• We like SREIT for its well-diversified portfolio in which the prominent assets are located at its unique township planning, 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 weakness in office segment.

Valuation

• Maintain HOLD recommendation with unchanged TP of RM1.70 based on FY18 forecasted DPU of 9.8 sen.
• Targeted yield at 5.8% based on historical average yield spread of SREIT relative to 10-year MGS.

Source: Hong Leong Investment Bank Research - 15 Feb 2017