Sunway REIT’s 1QFY21 core net profit of RM29.4m (+34.0% QoQ, -60.2% YoY) formed 10-11% of our and consensus initial 12M full year forecast. Overall, retail segment has recovered gradually, however hotel segment remained weak following the bleak hospitality industry. Following the announced change in financial year end to Dec as well as its below expectation results, we have revised our forecasts accordingly. We now expect FY21 to register RM351.4m (18M forecast) from RM283.1m previously. We maintain our FY22 forecast at RM299m and introduced FY23 forecast at RM308.1m. Downgrade to HOLD with a lower of TP: RM1.65 (from RM1.82) following the dilution of DPU by 10% from the recent placement exercise.

Below expectation. 1QFY21 core net profit of RM29.4m (+34.0% QoQ, -60.2% YoY) formed 10-11% of our and consensus initial 12M full year forecast. Our core net profit was derived after excluding the payment to perpetual note holders amounting to RM5m from Sunway REIT’s reported headline profit of RM34.4m. The deviation was due to lower-than-expected rental income coming from retail and hotel segments. Note that Sunway REIT has changed its FYE from June to Dec, making this year (i.e. FY21) an 18M financial year.

Dividend. Declared DPU of 0.90 sen for 1Q21 being the advance income distribution prior to the issuance of new units following the recent private placement exercise which was completed on 28 October 2020. (1Q20: 2.50 sen ; 4Q20: 2.38 sen)

QoQ. Total revenue rebounded by 22.1% due to lower base in 4Q20 coming from the rental assistance given to the retailers. However, higher revenue from retail segment (+43.7%) was offset by lower contribution from hotel segment (-60.2%) as a result of low occupancy on the back of bleak hospitality industry. Sequentially, core net profit was higher by 34%.

YoY. Top-line growth fell by 30.8%, mainly due to rental rebate granted to retail tenants and lease rebate to hotel lessees, impacted by the Covid-19 pandemic and restricted movement as well as no income from Sunway Resort Hotel, due to the ongoing refurbishment works. This in turn dragged down net profit by 60.2% following the relatively high operating leverage effect.

Outlook. Management shared that in 1Q21, its retail segment’s tenant sales and footfall has recovered to 70-80% of pre-Covid 19 levels. However, following the resurgence of cases recently, tenant sales and footfall has declined back to 50% of pre-Covid-19 levels at the moment, which has affected the recovery of the retail segment. Meanwhile for hotel segment, management saw some pent-up demand in 1Q21 following easing of restricted movement; however, it could only lift the average occupancy rate to slightly below 30% during the period. We expect Sunway REIT’s hotel segment to remain weak in near term following bleak hospitality industry as well as lower contribution from Sunway Resort Hotel as it was closed for phased refurbishment commencing July 2020 for 12-24 months. However, its office segment, services, industrial & others segment are expected to remain stable on the back of strong occupancy and resilient income base. In addition, its newly acquired asset The Pinnacle Sunway was just completed recently and will contribute positively to FY21’s earnings.

Forecast. Following the announced change in financial year end to Dec as well as its below expectation results, we have revised our forecasts accordingly. We now expect FY21 to register earnings of RM351.4m (18M forecast) from RM283.1m previously. We maintain our FY22 forecast at RM299m and introduced FY23 forecast at RM308.1m.

Downgrade to HOLD with a lower of TP: RM1.65 (from RM1.82) based on FY22 DPU on targeted yield of 5.1%, derived from 2-years historical average yield spread of Sunway REIT and MAGY10YR. Our TP was lowered following the dilution of DPU by 10% from the recent placement exercise. While we like Sunway REIT for its welldiversified portfolio in which the prominent assets are located at its unique township planning and strong backing from its sponsor, the challenging retail and hotel business climate (due to COVID-19 and restricted movement) has impacted its near term earnings. Furthermore, at the current level, its yield remains fair at 4.3%.

Source: Hong Leong Investment Bank Research - 24 Nov 2020