Sunway REIT’s 2QFY20 core net profit of RM77.2m (-2.1% QoQ, 16.2% YoY) brought 1HFY20 core net profit to RM156.0m (11.9% YoY); the results were within ours and consensus’ expectations. Declared dividend of 2.45 sen per unit. The improved performance was primarily due to contribution from the newly acquired Sunway University & college campus and better performance across all segments. We maintain our forecast; reiterate our BUY call with unchanged TP of RM2.02.

Within expectations. 2QFY20 core net profit of RM77.2m (-2.1% QoQ, +16.2% YoY) brought 1HFY20 core net profit to RM156.0m (+11.9% YoY).The results were within both ours and consensus expectations at 51% of full year forecast.

Dividend. 2QFY20 DPU of 2.45 sen (2QFY19: 2.25 sen), going ex on 27th Feb 2020.

QoQ. Revenue inched up by 0.3% mainly due higher retail (+1.1%) and office segments (+2.6%); however, these were partially offset by the drop in hotel segment by 4.6%. Property operating expenses was higher by 8%, which in turn dragged down net profit by 2.1%.

YoY. Top-line growth increased by 11.7% thanks to contribution from the newly acquired Sunway University & college campus (in April 2019) and better performance across all segments. Hotel segment jumped by 28% mainly from the contribution of Sunway Resort Hotel & Spa as the performance in preceding quarter of 2QFY19 was impacted due to refurbishment activity. Office segment showed an improvement by 10.7% owing to improved performance from better occupancy rates (from 69% in 2QFY19 to 77% in 2QFY20). Furthermore, ‘industrial and others’ segment was up by 10% due to new cycle of rental reversion. NPI was higher by 11.9% in line with the higher revenue, bringing up core earnings to RM77.2m (+16.2%).

YTD. Top-line growth rose by 9.9% attributable to contribution from the newly acquired Sunway University & college campus and better performance across all segments as mentioned above. Property operating expenses increased by 10.2% in line with rise in revenue, which in turn bumped up NPI by 9.8% and sequentially net profit by 11.9%.

Outlook. We reckon Sunway REIT will do better in FY20, primarily supported by full year income contribution of newly acquired Sunway university & college campus as well as stable contribution from all sectors and favorable interest rate environment. With the recent on-going Covid-19 outbreak, we are cautious that their hotel segment (c.10-15% contribution to overall revenue) would be negatively affected. Management also shared that they have seen some cancellations of rooms and events bookings in their hotel. However, we are unable to fully pencil in the magnitude of the decline at this juncture due to uncertainties of this outbreak. Furthermore, management’s hotel operator is looking into strategic revenue management and cost containment to enhance profitability for this hotel segment.

Forecast. Maintain as Result Were Inline.

Maintain BUY with an unchanged TP: RM2.02. 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 SunREIT and MAGY10YR. 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. Moreover, we believe the recent OPR cut will bode well with SunREIT’s share price, coupled with its defensive appeal as a high divvy yielder (5.3%).

Source: Hong Leong Investment Bank Research - 14 Feb 2020