Sunway REIT’s 12MFY21 core net profit of RM118.3m (-48.2% YoY) came in below ours and consensus 18MFY21 forecasts. The shortfall was due to lower than expected performance arising from MCO3.0/Phase 1 restrictions. YTD, revenue was heavily affected (-23.9%) by retail (-32.3%) and hotel (-50.7%) segments due to rental support provided as well as movement restrictions. We cut our FY21-23 forecasts by 20%/2%/2% to account for softer retail and hotel outlook with slower than expected recovery. Post adjustments our TP decreases to RM1.36 (from RM1.38), based on FY22 DPU on targeted yield of 5.1%. Maintain HOLD.

Below expectation. 4QFY21 core net profit of RM28.6m (-10.5% QoQ, +30.3% YoY) brought 12MFY21’s sum to RM118.3m (-48.2% 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 50%. The deviation was due to lower-than-expected performance in retail and hotel segments due MCO3.0/Phase 1 restrictions.

Dividend. Declared dividend of 1.63 sen per share, going ex on the 14th Sep 2021.

QoQ. Revenue of RM103.4m was stable (-0.8%), as shown by the improvement in retail segment (+9.2%) thanks to the strong recovery seen in Apr-May, which mitigated the fall in hotel segment (-39.8%). Net property income (NPI) fell (-7.0%) due to the increase in property (+10.2%) as well as other property expenses (+10.7%). All in all, core net profit of RM28.6m (-10.5%) was attained.

YoY. All segments improved which contributed to the higher revenue (+17.5%). Most prominently on (i) retail (+8.3%) on better tenants’ sales and lesser rental support given out, (ii) hotel (+23.6%) especially thanks to Sunway Putra Hotel’s guaranteed rental and (iii) office (+84.7%) backed by the newly acquired “The Pinnacle Sunway” (Nov 2020). Despite top line rise, NPI inched up only marginally (+2.8%) due to the increase in property (+50.2%) and other property expenses (+57.3%). Finance costs reduced (- 19.8%) due to lower interest rates. This led to a core net profit of RM28.6m (+30.3%).

YTD. Top-line declined (-23.9%), mainly due to (i) retail segment (-32.3%) on rental support given to affected tenants along with lower turnover rent, promotion and car park income; and (ii) hotel segment (-50.7%) due to multiple movement control orders, 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 (+52.6%) backed by newly acquired “The Pinnacle Sunway” (Nov 2020) and services segment (+2.8%) thanks to annual rental reversion. NPI decreased (-34.1%) due to the increase in property (+5.2%) as well as other property expenses (+5.3%).Other trust expenses increased (+19.3%) due to new acquisition, while finance cost was lower (-19.1%) from falling interest rates. Overall, core net profit was dragged down (-48.2%).

Occupancy and gearing. Sunway REIT has 18 properties in its portfolio. Occupancy for the hotel segment was dragged down to 26% (from 12MFY20: 53%) (excluding Sunway Resort Hotel being closed for refurbishment since Jul 2020) due to travel restrictions. Retail segment occupancy increase slightly to 96% (12MFY20: 95%). Office occupancy improved to 84% (12MFY20: 78%) backed by newly acquired “The Pinnacle Sunway” back in Nov 2020). Services, industrial and others segments’ occupancy remained the same at 100%. Gearing fell to 36.9% (from 4QFY20: 40.7%).

Outlook. While management remains cautious on the outlook for retail segment, we are slightly hopeful for some gradual recovery, given that the government has lifted (as at 16 Aug) the restrictions for 11 types of economic activities (i.e. electric & electronics, household & kitchen appliances, furniture, sports equipment, clothing & accessories, jewellery and haircuts) which enables fully vaxxed consumers to shop. As we understand, management has also been proactively striving towards vaccinating its front-facing workforce to enable stores to open. We foresee Sunway REIT’s hotel segment to remain challenging, taking into consideration the temporary closure on Sunway Resort Hotel due to refurbishment (since Jul 2020) along with borders that are still being closed. We expect 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 20%/2%/2% to reflect weaker retail and hotel segments with a slower than expected recovery.

Maintain HOLD, TP: RM1.36. Post adjustments, our TP is lowered to RM1.36 (from RM1.38), 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 - 1 Sept 2021