Sunway REIT’s 9MFY19 core net profit of RM210.8m (-1.6% YoY) was within our expectations but marginally below consensus. Declared dividend of 2.58 sen per unit. The decline YoY was primarily due to higher finance costs; however, it was slightly mitigated by the improved performance in retail, office and others segment. We factored in Sunway University Property, increasing our FY19-21 EPU by 1%, 4% and 6%. We maintain our HOLD call with higher TP of RM1.84 (from RM1.76) based on targeted yield 5.5%.

Within expectations. 9MFY19 revenue of RM434.7m (+2.5% YoY) translated into core net profit of RM210.8m (-1.6% YoY). The results were within ours but slightly below consensus expectations at 74.7% and 72.2% of full year forecast respectively.

Dividend. Declared 3rd interim dividend of 2.58 sen (3QFY18: 2.37 sen), going on ex on the 16th May, bringing YTD dividend to 7.31 sen (9MFY18: 7.42 sen).

QoQ/YoY. Revenue of RM151.5m (+8.6% QoQ; +7.1% YoY) translated to core net profit of RM75.1m (+15.6% QoQ; +10.1% YoY). The increase was mainly due to the improvement in all segments. Most prominently, in retail segment, office segment, and income guarantee from Sunway Clio Property (acquired 3QFY18).

YTD. Revenue rose by 2.5%, however it was followed by a slight dip of 1.6% in net profit. The lift in revenue was thanks to better performance in all segments, except for hotel. This was mainly due to office (improved occupancy in Sunway Putra Tower and Wisma Sunway) and others segments (attained positive rental reversion). However, the increased in finance cost contributed to the net profit decrease, caused by (i) higher average cost of debt (4.4%; 3QFY18: 3.95%) (post OPR hike) and (ii) higher principal amount to fund acquisitions.

Retail segment. Revenue recorded a 1.8% (+8.6% QoQ; +7.1% YoY) improvement mainly contributed by Sunway Pyramid Shopping Mall and Sunway Carnival Shopping Mall thanks to better turnover rent. However it was partially offset by lower performance of Sunway Putra Mall caused by attractive rental packages offered to maintain occupancy. Average occupancy rate for the segment maintained at 97%.

Office segment. Revenue projected a 16.5% (+5.9% QoQ; +17.5% YoY) increase, largely backed by higher occupancy in Sunway Putra Tower (commencement of new tenants) and Wisma Sunway (existing tenant expansion). Average occupancy rate for the segment increased to 71% (2QFY19: 69%).

Others segment. Improved by 5.8% (+4.7% QoQ; +4.8% YoY) mainly due to rental reversion in both Sunway Medical Centre and Sunway REIT Industrial.

Hotel segment. Lower revenue by -0.5% (+32.6% QoQ; +30.2% YoY) mainly caused by lower income from Sunway Resort Hotel & Spa (partial closure for refurbishment) and Sunway Putra Hotel (higher occupancy in 1QFY18 due to one-off contribution from SEA Games and ASEAN Para Games). This was mitigated by the new contribution of Sunway Clio Property (3QFY18). Hotel’s average occupancy rate dipped to 69% (2QFY19: 71%).

Forecast. We included in our model the newly acquired, Sunway University Property (15 April 2019) which revised our FY19-21 EPU by 1%, 4% and 6% respectively.

Maintain HOLD, TP: RM1.84. We maintain HOLD with higher TP to RM1.84 (from RM1.76), based on targeted yield of 5.5%, derived from 2 years historical average yield spread of Sunway REIT and 10 year MGS.

Source: Hong Leong Investment Bank Research - 3 May 2019