Sunway REIT’s 15MFY21 core net profit came at RM154.4m. The results came in within our expectations but below consensus 18MFY21 forecasts. QoQ saw some recovery with better performance in retail (+10.8%). We expect a better 6Q backed by the gradual recovery of mainly the retail and hotel segment, with lifted restrictions as well as year-end festivities. We maintain our forecast and HOLD call with unchanged TP of RM1.36 (FY22 DPU on 5.1% targeted yield).

Within expectation. 5QFY21 core net profit of RM36.0m (+26.2% QoQ, +22.8% YoY) brought 15MFY21’s sum to RM154.4m. Core net profit was derived after excluding the payment to perpetual note holders amounting to RM5.0m. The results came in within our expectations at 81% but below consensus at 64%.

Dividend. No dividend was declared as the income distribution payment frequency has been changed to semi-annually (since 3QFY20).

QoQ. Top line improved (+3.4%) mainly contributed by better performance in retail segment (+10.8%) due to better rental and sales turnover resulting from the lift of restrictions since 16 Aug, which offset the fall in hotel segment (-28.7%). Net property income (NPI) soared (+13.1%) thanks to lower property operating expenses (-11.4%) as well as other property expenses (-12.7%). All in all, core net profit of RM36.0m (+26.2%) was attained.

YoY. Revenue remained stable (-0.5%) driven by lower retail segment performance (-16.5%; lower rental and car park income impacted by multiple restrictions (EMCO and NRP Phases vs. SPLY which was in RMCO period) and was slightly cushioned by (i) higher hotel segment contribution (+121.6%; thanks to Sunway Putra Hotel’s guaranteed rental and Sunway Clio Hotel’s quarantine business) and (ii) office segment (+80.8%; mainly being backed by the newly acquired “The Pinnacle Sunway” in Nov 2020). NPI inched up higher (+3.6%) due to lower property operating expenses (-7.6%) and other property expenses (-9.1%). Finance costs decreased (-16.7%) due to lower interest rates which then followed by the increase in core net profit (+22.8%).

YTD. Revenue of RM517.8m was achieved. Retail and hotel segment was challenged with multiple phases of MCOs and NRP Phases; furthermore Sunway Resort Hotel was closed for refurbishment since Jul 2020. Office segment continued to sustain stable occupancy and further backed by the newly acquired “The Pinnacle Sunway” (Nov 2020). This was followed by NPI of RM334.0m and core net profit of RM154.4m. There are no comparisons to FY20 given the change in FYE.

Occupancy and gearing. Sunway REIT has 18 properties in its portfolio. Occupancy for the hotel segment fell slightly to 24% (vs. 4QFY21: 26%) (excludes Sunway Resort Hotel being closed for refurbishment since Jul 2020). Retail, and office segment showed continued stability at 96% and 84% respectively. Services, industrial and others segments’ occupancy remained at 100%. Gearing remained at 36.9%.

Outlook. As we understand retail mails have seen improving foot falls whereas hotels’ occupancy has been increasing thanks to the interstate travel banned being lifted. Hence, we foresee a better 6Q aided by the transition of NRP Phases as well as multiple festivities towards year end

Forecast. Maintain as the Results Were in Line.

Maintain HOLD, TP: RM1.36. Maintain HOLD with unchanged TP of RM1.36. Our TP is based on FY22 DPU on targeted yield of 5.1%, derived from 2-year historical average yield spread between Sunway REIT and MAGY10YR.

Source: Hong Leong Investment Bank Research - 10 Nov 2021