Sunway REIT’s 6MFY21 core net profit of RM57.8m (-61.7% YoY) came in below ours and consensus 18M forecasts. YTD, revenue was heavily affected by retail (-36.6%) and hotel (-76.8%) segments, due to rental support provided as well as movement restrictions. We cut our FY21-23 forecasts by 11%-6% to account for softer retail and hotel outlook. Post adjustments our TP decreases to RM1.48 (from RM1.65), based on FY22 DPU on targeted yield of 5.1%. Maintain HOLD.

Below expectation. 2QFY21 core net profit of RM28.5m (-3% QoQ, -63.1% YoY) brought 6MFY21’s sum to RM57.8m (-61.7% YoY). Core net profit was derived after excluding the payment to perpetual note holders amounting to RM5m. The results came in below both ours and consensus full 18M forecasts at 17% and 20% respectively. The deviation was due to lower-than-expected rental contribution from retail and hotel segments.

Dividend. Declared 2QFY21 DPU of 0.77 sen (6MFY21: 1.67 sen vs. 6MFY20: 4.95 sen), going ex on 24th Feb 2021.

QoQ. Revenue of RM95.8m showed a drop (-10.9%) primarily due to the retail segment (-26.9%), given the rental support it accorded to tenants. Nonetheless it was mitigated by better contribution from (i) hotel segment (+184.1%) thanks to the short period of allowable interstate travel and (ii) office segment (+38.8%) from the newly acquired “The Pinnacle” (20 Nov 2020). Finance costs declined (-6.1%) due to lower interest rates. All in all, core net profit of RM28.5m (-3.0%) was attained.

YoY/YTD. Top-line fell (-38.5% YoY, -34.7% YTD), mainly due to (i) retail segment (- 46.8% YoY, -36.6% YTD) on rental support given to affected tenants, as well as lower car park income, and (ii) lower contribution from the hotel segment (-64.9% YoY, -76.8% YTD) due to travel restrictions paired with temporary closure of Sunway Resort Hotel given ongoing refurbishment works. However, this was slightly cushioned by better contribution from office segment (+40% YoY, +22% YTD) supported by newly acquired “The Pinnacle”. Other trust expenses escalated (+98.5% YoY, +31.1% YTD) due to new acquisition, however finance cost was lower (-20.6% YoY, -17.9% YTD) from falling interest rates. Sequentially, core net profit was dragged down (-63.1% YoY, -61.7% YTD).

Occupancy and gearing. Sunway REIT has 18 properties in its portfolio. Occupancy for the hotel segment fell to 31% (exclusion on Sunway Resort Hotel) (from 6MFY20: 77%) while office occupancy improved to 85% (from 77%). Besides, other segments’ occupancy remained the same; retail 95%, services industrial and others segment at 100%. Gearing fell marginally to 37% (from 2QFY20: 39%).

Outlook. We anticipate Sunway REIT’s hotel segment to remain weak in the near term following bleak hospitality industry along with temporary closure of Sunway Resort Hotel due to refurbishment (since Jul 2020 for 12-24 months). We expect retail segment to improve gradually upon relaxation of MCO restrictions. As for its office, industrial & others segment, they are expected to remain stable on the back of strong occupancy and resilient income base.

Forecast. We cut our FY21-23 forecasts by 11%/6.2%/6% to reflect in a softer outlook in retail and hotel segments.

Maintain HOLD, TP: RM1.48. Post adjustments, our TP lowered to RM1.48 (from RM1.65), based on FY22 DPU on targeted yield of 5.1%, derived from 2-year historical average yield spread between Sunway REIT and MAGY10YR. Reiterate HOLD.

Source: Hong Leong Investment Bank Research - 10 Feb 2021