Due to Covid-19 pandemic, Sunway REIT’s hotel and retail segments were badly hit. Moving forward, with easing restrictions, we see recoveries in both space s (backed by local leisure and business travellers, higher footfall and potential “revenge spending”), whereas the office segment is expected to remain stable. We leave our forecasts unchanged. We increase our MGS assumption to 3.25% (from 3%), and re-compute our 2 year historical average yield spread from 2019- 2020 (instead of 2018-2019). Hence our TP decreases to RM1.45 (from RM1.48). Our TP is based on FY22 DPU on targeted yield of 5.2% (from 5.1%) derived from 2-year historical average yield spread between Sunway REIT and MAG10YR. Maintain HOLD.

We spoke with Sunway REIT recently. To broadly recap, Hotel and Retail segments were hit the most on the back of inter-district and inter-state travel restrictions, international travel restrictions, and various phases of MCOs; these led to a drop in 1HFY21 revenue by -77% (YoY) and -37% (YoY) respectively.

Hotel. Average hotel occupancy for 1HFY21 fell to 31% (vs. 1HFY20: 77%), where the drop was in line with the low international tourist arrival of 4.3m in CY20 (CY19: 27.4m). We anticipate Sunway REIT’s hotel segment to remain soft in the near term following bleak hospitality industry outlook along with temporary closure of Sunway Resort Hotel due to refurbishment (reopens in phases commencing since Dec). That said, with inter state borders re-opening, we can expect gradual respite from domestic leisure and business travelers. Sunway REIT will be focusing on cost containment and lean operations by prioritizing critical expenditures and enhance distinctive marketing and collaboration (the highly anticipated Gordan Ramsay Restaurant is set to open in Sunway Resort Hotel in June 2021).

Retail. Overall retail occupancy remains healthy at 95%, especially for Sunway Pyramid Mall, being strategically located within an integrated township showed great resiliency as occupancy was unchanged (1HFY21: 97.0% vs. 1HFY20: 97.2%). We expect the retail segment to improve gradually from relaxation of restrictions and we foresee pent up local demand aided by “revenge spending”, like we saw during RMCO previously. We are encouraged that footfall has recovered back to last year’s RMCO levels. Moreover, the continuation of 10% electricity tariff rebate would aid in the recovery via reduction in operating costs. While we are aware that rental assistance would still be given on a case by case basis, we understand the quantum has been cut. Sunway REIT will be focussing on rebuilding shoppers’ confidence by improving safety and hygiene standards, develop asset enhancement initiatives (AEIs) as well as retaining tenants and business partners by working closely together.

Office. 1HFY21 occupancy rates improved to 85% (77% SPLY) thanks to the newly acquired The Pinnacle Sunway (on 20 Nov 2020). We expect Sunway REIT’s office segment to be largely stable, supported by the new acquisition as well as strong occupancy and resilient income base across all its office properties. Sunway REIT will focus on ways to adapt to WFH situations, by accommodating flexible work stations, customisable enhancements as well as cost saving benefits. We feel the speed of vaccine roll out would be crucial in paving the way for business recovery that will follow with more workers coming back into office.

Industrial. Exceptional growth of the e-commerce sector was seen during the pandemic, furthermore online shopping has become the new norm, which created a strong tailwind for the operations of warehousing and logistics companies. Sunway REIT continues to seek opportunities in this segment (currently has 1 asset) in view of Malaysia’s resiliency in the industrial sector especially in manufacturing, logistics and  distribution activities. Overall, Sunway REIT target property value by 2025 is RM13- 15bn (FY20: RM8.5bn).

ESG update. On the spotlight of Covid-19, Sunway REIT is one of the first few retail mall owners to proactively establish a rental support programme for tenants. Meanwhile Sunway Pyramid Convention Centre was appointed as the Vaccination Centre for Petaling District. Apart from that, Sunway REIT has been an advocate of the United Nation’s Sustainable Development Goals (UNSDG), which drives sustainable initiatives such as (i) energy saving, waste reduction and recycling, (ii) solar energy projects and rainwater harvesting and (iii) food waste composing.

Forecast. Unchanged.

Maintain HOLD, TP: RM1.45. With the MGS rising steadily since end Feb, we take the opportunity to increase our average MGS assumption to 3.25% (from 3%) as well as re-computing our 2 year historical average yield spread from 2019-2020 (instead of 2018-2019). Post adjustments our TP decreases to RM1.45 (from RM1.48). Our TP is based on FY22 DPU on targeted yield of 5.2% (from 5.1%) derived from 2-year historical average yield spread between Sunway REIT and MAG10YR. Reiterate HOLD.

Source: Hong Leong Investment Bank Research - 24 Mar 2021