Sunway REIT’s FY20 core net profit to RM248.6m (-13.2% YoY) were slightly below ours but within consensus’ expectations. Overall, the performance was affected by COVID-19 headwinds, coming from rental support granted to nonessentials retail tenants during MCO period and lease rebate to hotel lessees. While Sunway REIT has to contend with the challenging retail and hotel business climate (due to COVID-19 and restricted movement), nonetheless at current levels, the stocks' yield remains appealing (6.2%) even after imputing negative repercussion from this crisis. We maintain our forecast; reiterate our BUY call with unchanged TP of RM1.74.

Slight miss. 4QFY20 core net profit of RM26.9m (-59.0% QoQ, -62.3% YoY) brought FY20 core net profit to RM248.6m (-13.2% YoY). The results were slightly below ours (93%) but within consensus expectations (96%). During the quarter, we added back a +RM41.3m (unrealised fair value loss) and -RM0.9m (reversal tax expense on fair value loss) from SunREIT’s reported net loss of RM13.5m.

Dividend. Declared dividend of 2.38 sen, which brought FY20 dividend to 7.33 sen (FY19: 9.59 sen), going ex on the 17th August 2020.

QoQ/YoY. Revenue slipped down to RM88m (-37.5% QoQ, -39.5% YoY) mainly due lower income contribution from the retail (-45.0% QoQ, -48.9% YoY) and hotel segment (-54.1% QoQ, -53.3% YoY) attributable to rental rebate granted to retail tenants and lease rebate to hotel lessees. This in turn has dragged down net profit to RM26.9m (-59.0% QoQ, -62.3% YoY).

YTD. Top-line growth fell by 7.0%, mainly due to rental rebate granted to retail tenants and lease rebate to hotel lessees, impacted by the outbreak of COVID-19 pandemic and MCO, partially cushioned by the contribution of the newly acquired Sunway university & college campus and improved performance from its office segment (+8.5%). NPI decreased by 9.1% in line with lower revenue, which in turn brought down net profit by 13.2%.

Outlook. We believe the worst is over for SunREIT and we expect a recovery in FY21 coupled with new contribution from newly acquired The Pinnacle Sunway. Management shared that during CMCO/RMCO, footfalls and tenants sales growth in their malls has shown some encouraging recovery signs although their renewal has been hampered with negative double digit rental reversion. Management expects that FY21 rental reversion to be flattish on the back of economic uncertainties. While for hotel segment, management has seen some uplift in their occupancy as hotels operators marched in with attractive promotions to reactivate travelling activities . Its office segment is relatively more insulated and stable, in view that these office properties are located in established locations. Furthermore, their services segment and “industrial & others” segment are expected to continue to perform as usual despite the crisis as they are generally unaffected by COVID-19 and MCO/RMCO.

Forecast. As the results shortfall was marginal, we keep our forecast unchanged.

Maintain BUY with an unchanged TP: RM1.74 based on FY21 DPU on targeted yield of 5.4%, derived from 2-years historical average yield spread of Sunway REIT and MAGY10YR. We continue to like Sunway REIT for its well-diversified portfolio in which the prominent assets are located at its unique township planning and strong backing from its sponsor. While Sunway REIT has to contend with the challenging retail and hotel business climate (due to COVID-19 and restricted movement), nonetheless at current levels, the stocks' yield remains appealing (6.2%).

Source: Hong Leong Investment Bank Research - 4 Aug 2020