Sunway REIT’s 18MFY21 core net profit came at RM222.0m. The results were above our expectations but below consensus 18MFY21 forecasts. QoQ saw revenue improvement (+29.3%) from better performance in hotel (+59.0%) and retail (+42.4%) thanks to the festive season and school holidays. We expect lower rental support to be provided in FY22 and feeling upbeat on the re-opening of Sunway Resort Hotel in 1HFY22. We increase our FY22-23 forecasts by 4.5%/3.5% to account for lower rental support provided. Post earnings adjustments, our TP rises to RM1.54 (from RM1.49), based on targeted yield 4.6% on FY22 DPU. Upgrade to BUY.

Above expectation. 6QFY21 core net profit of RM67.6m (+87.7% QoQ, +137.5% YoY) brought 18MFY21’s sum to RM222.0m. Core net profit was derived after excluding the payment to perpetual note holders RM5.0m. The results came in above our expectations at 115% but below consensus at 90%.

Dividend. Declared dividend of 2.80 sen per unit, going ex on the 15 Feb 2022. This brings FY21 DPU to 6.10 sen.

QoQ. Revenue improved (+29.3%) mainly contributed by better performance in hotel (+59.0%; recovering occupancy) and retail (+42.4%; lower rental support provided and higher car park income) segments which thanks to festive season and school holidays. Net property income (NPI) was up (+46.8%) due to lower property operating expenses (-4.6%), quit rent and insurance (-4.1%) as well as other property expenses (-4.7%). Finance costs remained stable (-0.2%). Thus, core net profit of RM67.6m (+87.7%) was attained.

YoY. Top line increased (+44.3%) essentially driven by stronger showing in (i) retail (+62.7%; lower rental support given and higher car park income), (ii) office (+31.4%; newly acquired “The Pinnacle Sunway” in Nov 2020) and (iii) hotel (+24.0%; improvement during NRP on occupancy and gradual resumption of events vs SPLY with RMCO and CMCO). Healthier NPI (+56.8%) was in line with higher revenue. Decrease in finance costs (-11.5%) and other trust expenses (-29%) further aided in core net profit improvement (+137.5%).

FY21. Revenue of RM656.0m was achieved. Retail and hotel segments were challenged with multiple phases of MCOs and NRP Phases; furthermore, Sunway Resort Hotel was closed for refurbishment since Jul 2020. Office segment was backed by the newly acquired “The Pinnacle Sunway” (Nov 2020). Services segment achieved positive rental reversion during the period (accordance to master lease agreement). These were followed by NPI of RM437.5m and core net profit of RM222.0m. There are no comparisons to FY20 given the change in FYE.

Occupancy and gearing. Sunway REIT has 18 properties in its portfolio. Hotel and retail occupancy improved to 32% (vs. 5QFY21: 24%) (excludes Sunway Resort Hotel being closed for refurbishment since Jul 2020) and 97% (vs. 5QFY21: 96%) respectively. Office segment showed continued stability at 84%. Services, industrial and others segments’ occupancy remained unchanged at 100%. Meanwhile gearing increased slightly to 37.2% (5QFY21: 36.9%).

Outlook. Moving into FY22, we expect a continuous recovery in retail and hotel segments being backed by economic recovery and ongoing booster shots rollout. Furthermore, Sunway Resort Hotel is expected to re-open in 1HFY22. Whereas office, services, industrial and other segments are expected to continue its stability.

Forecast. We increase our FY22-23 forecasts by 4.5%/3.5% to account for faster recovery in FY22 with lower rental support provided to affected tenants as well as the expectation of the reopening of Sunway Resort Hotel in 1HFY22.

Upgrade to BUY, TP: RM1.54. Post earnings adjustments, our TP rises to RM1.54 (from RM1.49). Our TP is based on FY22 DPU on targeted yield of 4.6%, derived from -1SD below 2-year historical average yield spread between Sunway REIT and MAGY10YR in view of its diversified portfolio.

Source: Hong Leong Investment Bank Research - 31 Jan 2022