Results

• Reported 1QFY18 gross revenue of RM141.2m (+9.5% yoy), translated into normalised net profit of RM78.7m (+19.6% yoy), accounting for 27.4% and 28.1% of HLIB and consensus forecasts, respectively.

Deviations

• Above expectations due to lower property operating expenses.

Dividends

• Proposed 1st interim dividend of 2.67 sen (1Q17: 2.27 sen).

Highlights

• YoY: Revenue and net profit grew by 9.5% & 19.6% respectively due to strong performance from all segments.
• Retail: Higher net property income (NPI) from retail (+9.5%) was driven by Sunway Pyramid (SP) and Sunway Carnival Mall (SCM) on the back of higher base rent. Moreover, the performance was further enhanced by lower maintenance expenses in SP.
• Hotel: Higher NPI from hotel (+44.2%) was driven by reopening of Sunway Pyramid Hotel (SPH) following its completion of refurbishment. The strong performance was also attributable to better contribution from Sunway Putra Hotel due to impact from the SEA Games.
• QoQ: Normalized net profit grew by 17.8% due to higher NPI from all segments but partially offset by higher finance costs incurred to fund acquisitions.
• Outlook: For FY18, a moderate growth in DPU is expected due to (i) resumption in income contribution from SPH following the completion of refurbishment, (ii) moderate growth in retail segment, (iii) income contribution from newly acquired assets and (iv) gradual improvement in office segment.

Risks

• Prolonged dampening of office market and consumer sentiment.

Forecasts

• Raise our FY18-19 EPU forecast by 1.7%-2.1% respectively after incorporating lower property operating expenses.

Rating

HOLD ↔ , TP: RM1.73 ↑

• We like SREIT for its well-diversified port folio in which the prominent assets are located at its unique township planning with large acquisition pipeline and strong backing from sponsor. However, we expect limited inorganic growth potential for the REIT in short term due to limitation of gearing ratio.

Valuation

• Maintain HOLD recommendation with higher TP of RM1.73 based on FY18 forecasted DPU of 10.0 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 - 01 Nov 2017