Sunway REIT’s 4QFY19 core net profit of RM70.5m (-6.1% QoQ, 14.6% YoY) brought FY19 core net profit to RM281.3m (2.0% YoY). The results were within both ours and consensus expectations. Declared dividend of 2.28 sen per unit. The lift YoY was due to higher contribution from Others, Office and Retail segment, but was offset by the Hotel segment. We maintain our forecasts; reiterate HOLD with unchanged TP of RM1.89 based on targeted yield 5.4%.

Within expectations. 4QFY19 core net profit of RM70.5m (-6.1% QoQ, 14.6% YoY) brought FY19 core net profit to RM281.3m (2.0% YoY). The results were within both ours and consensus expectations at 98% and 97% respectively.

Dividend. Declared dividend of 2.28 sen (4QFY18: 2.15 sen), going ex on the 23rd August 2019 Bringing FY19 Dividend to 9.59 Sen (FY18:9.57 Sen)

QoQ. Revenue of RM145.6m showed a decrease of 3.9%, followed by a drop in core net profit of RM70.5m by 6.1%. The drop was mainly due lower contribution from Hotel (-35%) and Retail (-4%) segment, however, it was cushioned by higher contribution by Others segment (96.3%), due to new income contribution of Sunway university & college campus (acquired in April 2019).

YoY. Revenue increased by 6.8% followed by an increase of 14.6% in core net profit. The increase was mainly due to the improvement in all segments except for Hotel segment (weaker performance during Ramadhan and Hari Raya period). Most prominently, in Others segment (+105.6%) with the addition of Sunway university & college campus (acquired in April 2019), followed by Office segment (+10.3%) and Retail segment (+4.5%).

FY19. Revenue of RM580.3m improved by 3.5%, followed by an increase in core net profit of RM281.3m by 2.0%. The lift in revenue was thanks to better performance in all segments, except for Hotel. Retail segment saw an increase by 2.4% due to better contribution from Sunway Pyramid (higher turnover rent and positive rental reversion). Moreover, Office segment was higher by 14.8% mainly due to Sunway Putra Tower and Wisma Tower (increase in occupancy with commencement of new tenants) as well as Menara Sunway (higher renewal rate). Meanwhile Others segment showed improvement of 31.6% which was mainly due Sunway university & college campus (new income contribution) and Sunway Medical Centre (better rental reversion).

Occupancy and gearing. Occupancy remained at 84.3% (Retail segment 96%, Hotel segment 69%, Office segment 72% and Others segment 100%). As for gearing level, it tapered to 37.9% (3Q19: 38.4%), with a majority of its total borrowings being charged a floating interest rate (55%).

Outlook. We believe Sunway REIT will do better in FY20, primarily supported by full year income contribution of newly acquired Sunway university & college campus as well as modest growth in Retail segment. Office segment outlook remains challenging backed by the oversupply situation. Nonetheless Sunway REIT plans on exercising asset enhancement initiatives (AEIs) in all their office to strengthen their presence. We remain cautious on their Hotel segment with overall softer tourism sentiment but this should see improvement in 2020 in conjunction with Visit Malaysia Year.

Forecast. Maintain as the Results Were Inline.

Maintain HOLD, TP: RM1.89. We maintain HOLD with unchanged TP to RM1.89, based on targeted yield of 5.4%, derived from 2 years historical average yield spread of Sunway REIT and 10 year MGS.

Source: Hong Leong Investment Bank Research - 9 Aug 2019