Sunway REIT’s FY18 normalised net profit of RM275.7m (+3.2% YoY) was within both ours and consensus expectations. Declared dividend of 2.15 sen per unit. The better performance was primarily contributed by newly acquired properties: Sunway Clio Property & Sunway REIT Industrial – Shah Alam 1. The overall enhancement was slightly mitigated by higher finance costs. We retain our forecast and maintain our BUY call with unchanged TP of RM1.82.

Within expectations. FY18 revenue of RM560.4m (+7.2% YoY) translated into normalised net profit of RM275.7m (+3.2% YoY). The results were within expectations at 96% of both ours and consensus full year forecast.

Dividend. Declared dividend of 2.15 sen (4QFY17: 2.27 sen) going ex on the 23rd

August 2018 Bringing YTD Dividend to 9.57 Sen (FY17:9.19 Sen).

QoQ/YoY. Normalized net profit fell (QoQ: -9.8%, YoY: -8.0%). While revenue improved (2.8% YoY) due to contributions of new assets and overall growth in all segments; the drop in net profit was mainly caused by higher finance costs to fund acquisitions and higher average cost of debt following the increase in OPR in January.

FY18. FY18 normalized net profit increased by 3.2% mainly driven by new revenue contribution from newly acquired Sunway Clio Property (February 2018) and Sunway REIT Industrial – Shah Alam 1 (August 2017). Overall, all segments contributed to positive revenue growths, with the office segment improved by 28.6% despite the broad oversupply situation. The improvement was slightly offset by the increase in finance costs due to (1) higher principal amount to fund acquisitions and (2) higher average cost of debt (post OPR hike in January).

Retail. Higher FY18 revenue from retail segment by 2.8% YoY was supported by higher contribution from all malls except SunCity Ipoh Hypermarket.

Hotel. FY18 revenue recorded an improved 28.2% YoY driven by higher contribution from Sunway Pyramid Hotel (post refurbishment June 2017), improved occupancy in Sunway Putra Hotel (gain from SEA Games and ASEAN PARA Games) and new contribution from Sunway Clio Property. This was slightly offset by lower proceeds from Sunway Resort Hotel & Spa due to softer leisure segment demand.

Office. Revenue increment of 6.3% YoY was registered in FY18, largely contributed by higher occupancy in Sunway Putra Tower thanks to new tenants on board. This was partly offset by lower occupancy in Wisma Sunway however this is not alarming as it is due to transition of tenants.

Outlook. Management expects occupancy continue to improve in FY19 with the success in securing new tenants. Also, management is undergoing some hotel refurbishment on Sunway Resort Hotel & Spa’s ballroom, meeting and function facilities in order to provide improved experience and stay relevant with consumers’ expectations. We do not expect inorganic growth in short term due to the limitation of gearing ratio of 38.6% as at FY18 (FY17:34.2%).

Forecast. Maintain as the Results Were Inline.

Maintain BUY, TP: RM1.82. Maintain our BUY call with unchanged TP of RM1.82 based on targeted yield of 5.8% which is derived from 2 years historical average yield spread of Sunway REIT and 10 year MGS. We continue to like SREIT for its well diversified portfolio in which the prominent assets are located at its unique township planning and strong backing from sponsor.

Source: Hong Leong Investment Bank Research - 10 Aug 2018