Sunway REIT’s 1HFY19 core net profit of RM135.8m (-7.0% YoY) was within our expectations but marginally below consensus’ expectations. Declared dividend of 2.25 sen per unit. The decline YoY was primarily due to lower contribution from the hotel segment and higher finance costs. However, it was slightly mitigated by the improved performance in retail, office and others segment. We maintain our forecast; reiterate our HOLD call with unchanged TP of RM1.70.

Within expectations. 1HFY19 revenue of RM283.2m (+0.2% YoY) translated into core net profit of RM135.8m (-7.0% YoY). The results were within ours but slightly below consensus expectations at 48% and 46% of full year forecast respectively.

Dividend. 2QFY19 DPU of 2.25 sen (2QFY18: 2.38 sen), going ex on 27th Feb 2019.

QoQ/YoY. Revenue of RM139.5m (-3.0% QoQ; -1.4% YoY) translated to core net profit of RM65.0m (-8.2% QoQ; -5.1% YoY). The decline was mainly due to lower performance in the hotel segment. Most prominently, Sunway Resort Hotel & Spa achieved lower rental due to disruption from the closure of the grand ballroom, meeting and function rooms for refurbishment (July-November 2019).

YTD. Revenue improved slightly by 0.2%, however it was followed by a decrease of 7.0% in net profit. The lift in revenue was backed by better performance of all segments, except for hotel segment. This was mainly due to Sunway Resort Hotel & Spa (disruption from refurbishment July-November 2018) and Sunway Putra Hotel (higher occupancy in 1QFY18 due to SEA Games and ASEAN Para Games and lack of demand from group corporate bookings). Higher finance cost contributed to the net profit decrease, which were caused by (i) higher principal amount to fund acquisitions and (ii) higher average cost of debt (4.03%; 2QFY18: 3.93%) (post OPR hike).

Retail segment. Revenue recorded a 1.4% improvement mainly contributed by Sunway Pyramid Shopping Mall and Sunway Carnival Shopping Mall thanks to better turnover rent during the festive periods. Nevertheless it was partially offset by lower performance of Sunway Putra Mall attributed to attractive rental packages offered. Average occupancy rate for the segment is 97%.

Office segment. Revenue showed a 16.0% increase, largely backed by higher occupancy in Sunway Putra Tower and Wisma Sunway thanks to new tenants on board and existing tenant expansion respectively. Current average occupancy rate for the segment is 69%.

Others segment. Improved by 6.4% mainly due to rental reversion in Sunway Medical Centre. Occupancy rate for both Sunway Medical Centre and Sunway REIT Industrial – Shah Alam 1 is 100%.

Hotel segment. Lower revenue was attained (-12.5%) driven by the lower income from Sunway Resort Hotel & Spa, caused by the partial closure for refurbishment; and high base effect from Sunway Putra Hotel due to the higher average occupancy back in 1QFY18 on the back of one-off contribution from the SEA Games and ASEAN Para Games. This was partially mitigated by the new contribution of Sunway Clio Property (3QFY18). Average occupancy rate for the segment stood at 71%.

Forecast. Maintain as the Results Were in Line.

Maintain HOLD, TP: RM1.70. We maintain HOLD with unchanged TP to RM1.70, based on targeted yield of 5.7% which is derived from 2 years historical average yield spread of Sunway REIT and 10 year MGS.

Source: Hong Leong Investment Bank Research - 15 Feb 2019