Sunway REIT’s 9MFY21 core net profit of RM89.8m (-56.6% YoY) came in below ours and consensus 18MFY21 forecasts. YTD, revenue was heavily affected by retail (-39.4%) and hotel (-59.2%) segments, due to rental support given to affected tenants as well as movement restrictions. We cut our FY21-23 forecasts by 24.3%/6.6%/6.5% to account for softer retail and hotel outlook with expectations of continuations of MCOs. Post adjustments our TP decreases to RM1.38 (from RM1.45), based on FY22 DPU on targeted yield of 5.1%. Maintain HOLD.

Below expectation. 3QFY21 core net profit of RM31.9m (+12.0% QoQ, -47.4% YoY) brought 9MFY21’s sum to RM89.8m (-56.6% YoY). Core net profit was derived after excluding the payment to perpetual note holders amounting to RM4.9m. The results came in below both ours and consensus 18MFY21 forecasts at 29%-30% respectively. The deviation was due to lower-than-expected performance in retail and hotel segments due MCO2.0 in Selangor, Kuala Lumpur and Penang.

Dividend. No dividend is declared as the income distribution payment frequency is semi-annually (since 3QFY20) to sustain the trust through this challenging period.

QoQ. Revenue of RM104.3m improved (+8.9%) primarily thanks to (i) hotel segment (+81.6%) on guaranteed income received for Sunway Clio Property and Sunway Hotel Georgetown as well as (ii) office segment (+33.0%) backed by newly acquired “The Pinnacle” (20 Nov 2020). On the other hand, the retail segment was affected (-5.5%) due to the implementation of MCO2.0 in Selangor, Kuala Lumpur and Penang. Finance costs declined (-5.6%) due to lower interest rates. All in all, core net profit of RM31.9m (+12.0%) was attained.

YoY/YTD. Top-line decreased (-25.9% YoY, -32.0% YTD), mainly due to (i) retail segment (-45.4% YoY, -39.4% YTD) on lower rental income with rental support given to affected tenants, paired with lower car park income; and (ii) hotel segment (-5.8% YoY, -59.2% YTD) due to travel restrictions paired with temporary closure of Sunway Resort Hotel given ongoing refurbishment works (since Jul 2020). Nevertheless, this was slightly mitigated by better contribution from office segment (+79.9% YoY, +41.9% YTD) backed by newly acquired “The Pinnacle”. Other trust expenses increased due to new acquisition, while finance cost was lower (-21.2% YoY, -18.9% YTD) from falling interest rates. Overall, core net profit was dragged down (-47.4% YoY, -56.6% YTD).

Occupancy and gearing. Sunway REIT has 18 properties in its portfolio. Occupancy for the hotel segment was dragged down to 27% (from 9MFY20: 66%) (excluding Sunway Resort Hotel as it is closed for refurbishment since Jul 2020) due to travel restrictions. Retail segment occupancy fell slightly to 95% (9MFY20: 96%). Office occupancy improved to 85% (9MFY20: 78%) backed by newly acquired “The Pinnacle” back in Nov 2020). Services, industrial and others segments’ occupancy remained the same at 100%. Gearing fell marginally to 37.1% (from 3QFY20: 38.2%).

Outlook. We anticipate Sunway REIT’s hotel and retail segment to remain challenging amid temporary closure of Sunway Resort Hotel due to refurbishment (since Jul 2020 for 12-24 months) and stricter travel restrictions. We foresee office, industrial & others segment, to remain stable on the back of strong occupancy and resilient income base.

Forecast. We cut our FY21-23 forecasts by 24.3%/6.6%/6.5% to reflect weaker retail and hotel segments given the perils of an “on/off economy” from MCOs due to increasing Covid-19 cases. 

Maintain HOLD, TP: RM1.38. Post adjustments, our TP is lowered to RM1.38 (from RM1.45), 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 - 20 May 2021