Sunway REIT’s 1QFY20 core net profit of RM77.7m (+10.3% QoQ, +9.8% YoY) was within our expectations and consensus. Declared dividend of 2.50 sen per unit. The improved performance was mainly due to contribution from the newly acquired Sunway university & college campus (acquired in April 2019) and better performance across all segments. Our FY20-21 earnings adjusted by +3.6% and +7.2% after we updated for annual report figures. FY22 projections are introduced. Upgrade to BUY, TP: RM2.02 (from TP of RM1.95) as we rolled forwards our valuation to FY21.

Within expectations. 1QFY20 core net profit of RM77.7m (+10.3% QoQ, +9.8% YoY) was within our expectations and consensus accounting for 26% and 25.3% of full year forecast respectively.

Dividend. 1QFY20 DPU of 2.50 sen (1Q19: 2.48 sen), going ex on 19th Nov 2019.

QoQ. Revenue improved by 6.7% mainly due higher hotel segment (+57.4%) attributable to higher income at Sunway Resort Hotel and Spa (SRHS) and Sunway Pyramid Hotel as 1Q is traditionally the peak period for these due hotels due to higher tourists from Middle East. In addition, it is also attributable to recognition of income guarantee for Sunway Clio Hotel in this quarter. Net property income (NPI) increased by 7.1% in tandem with higher revenue and a tad increase of property expenses (+5.5%). In turn, core earnings rose by 10.3% on back of flattish finance cost (+1.4%).

YoY. Top-line growth increased by 8.1% thanks to contribution from the newly acquired Sunway University & college campus (acquired in April 2019) and better performance across all segments. NPI was higher by 7.7% in line with higher revenue bringing core earnings to RM77.7m (+9.8%).

Segments contribution. Retail segment revenue increased marginally by 0.6% mainly contributed by Sunway Carnival due to higher promotional income. However, NPI for retail segments saw a reduction of 3.1% mainly due to a lower base for advertising and promotional expense last year (1QFY19) for Sunway Pyramid. The hotel segment recorded increase in revenue of 4.8% amid a lower base last year from SRHS closure of Grand Ballroom and meeting rooms for refurbishment. Office segment revenue climbed by 11.6% mainly contributed by overall improved performance from all office properties. The services segment contributed revenue and NPI growth of >100% due to contribution of Sunway university & college campus and Sunway Medical Centre from the rental reversion. Sunway REIT Industrial – Shah Alam 1 revenue rose by 10% due to new cycle of rental reversion.

Outlook. We reckon Sunway REIT will do better in FY20, primarily supported by full year income contribution of newly acquired Sunway university & college campus. Furthermore, in conjunction with Visit Malaysia Year 2020, we believe Sunway REIT will benefit especially on their retail and hotel segments.

Forecast. Our FY20-21 earnings are adjusted by +3.6% and +7.2% after we updated for annual report figures. FY22 projections are introduced.

Upgrade to BUY, TP: RM2.02. (from TP of RM1.95) as we rolled forwards our valuation to FY21. Notably, our valuation is based on FY21 DPU on targeted yield of 5.2% which is derived from 2-years historical average yield spread of Sunway REIT and MAGY10YR.

Source: Hong Leong Investment Bank Research - 6 Nov 2019