Results

• Reported 9MFY17 gross revenue of RM390.3m (+1.8% yoy) which translated into normalised net profit of RM197.1m (+3.7% yoy), accounting for 73.9% and 73.2% of HLIB and consensus forecasts, respectively.

Deviations

• None.

Dividends

• Declared 3rd interim dividend of 2.37 sen (3QFY16: 2.37 sen), bringing YTD dividend to 6.92 sen (FY16: 7.06 sen).

Highlights

• YoY: Revenue and net profit for 3QFY17 increased by 3.2% and 9.7% respectively due to strong performance by the retail and office segment, partially mitigated by weak performance from hotel segment.
• Higher NPI from retail (+3.5%) was driven by Sunway Pyramid (SP) and Sunway Putra Mall (SPM) on the back of higher base rent. However, it was partly offset by higher advertising and promotion expenses for SP and high assessment for SPM. To note, 84% of expiring total net lettable area of SP in FY17 was renewed at a mid-single digit rental reversion rate.
• The decline in NPI from hotel segment (-7.2%) was due to competitive market environment, weak corporate and leisure market as well as the closure of Sunway Pyramid Hotel (SPH) for refurbishment which is expected to be completed by 4QFY17. Moreover, going forward the hotel segment may be negatively affected by the newly int roduced Tourism Tax Bill as the cost may not be fully passed on to consumers.
• QoQ: Net profit remained flattish as higher net property income was offset by lower other income due to presence of one-off other income in 2QFY17.
• YTD: Similar trend and reasons observed for all the segments whereby impressive performances from retail and office segment were dragged by lower contribution from hotel segment.
• Outlook: 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 port folio 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-to-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 - 04 May 2017