Sunway REIT’s 1QFY22 core net profit of RM83.1m (+22.9% QoQ, +160.5% YoY) came in above both ours and consensus full year forecasts. Revenue improved (+47.7% YoY) mainly thanks to retail (+83.5%; stronger tenant sales) and hotel (+28.6%; higher occupancy) segments. We updated FY21 accounts, introduce FY24 forecasts, and increase FY22-23 earnings by 10%-13% on expectations of higher income moving forward. That said, we increase our MGS assumption to 4.25% (from 3.75%) and post earnings adjustments, our TP increa ses to RM1.67 (from RM1.54) based on FY23 DPU on targeted yield 5.1%. Maintain BUY.

Above expectation. 1QFY22 core net profit of RM83.1m (+22.9% QoQ, +160.5% YoY) was derived after excluding fair value gains (RM18.3m) and payment to perpetual note holders (RM4.9m). The results came in above both ours and consensus full year forecasts at 31% – positive deviation mainly stemmed from top-line.

Dividend. None as dividends are payable semi-annually.

QoQ. The improvement in revenue of RM154.0m (+11.4%) was essentially contributed by (i) hotel (+88.4%; better occupancy backed by increased domestic leisure and business travels along with relaxation of Covid-19 restrictions) and (ii) industrial & others segment (+10.1%; positive rental reversion from latest rent review in Jan 2022). Besides, finance costs declined (-2.5%) due to lower interest rates. Overall, core net profit of RM83.1m (+22.9%) was attained.

YoY. The 47.7% increase in top-line was primarily driven by stronger contribution in (i) retail (+83.5%; better performance in all retail properties especially in Sunway Pyramid Mall, boosted by higher retail footfall and tenant sales in conjunction with strong pent up demand and festive spending), (ii) hotel (+28.6%; improved occupancy due to increased domestic leisure and business travels) and (iii) industrial & others segment (+10.0%; positive rental reversion achieved, in accordance to the master lease agreement). Accordingly, net property income (NPI) was up 77.4%, partly also due to lower property opex (-5.9%), quit rent and insurance (-19.5%) and other property opex (-4.4). Separately, finance costs decreased (-8.6%; lower interest rates) and led to core net profit of RM83.1m (+160.5%).

Occupancy and gearing. Sunway REIT has 19 properties in its portfolio. Occupancy for the hotel segment improved to 42% (FY21: 32%) (excluding Sunway Resort Hotel) mainly thanks to increased domestic and business travels. Retail and office segment occupancy remained stable at 97% and 84% respectively. While services, industrial and others segments’ occupancy remained at 100%. Gearing remained at 37.2%.

Outlook. We expect continued recovery in retail and hotel segments being backed by economic recovery and reopening of international borders. We are looking forward to resumption of income from Sunway Resort Hotel (was closed for refurbishment since Jul 2020) since its commencement of operations in May. Whereas office, services, industrial and other segments are expected to continue its stability.

Forecast. We updated our model for FY21 audited accounts, introduce FY24 forecasts, and increase FY22-23 earnings by 10%-13% as we factor in higher rental income going forward, with the reopening of Sunway Resort Hotel as well as expectation of lower rental support to be provided.

Maintain BUY, TP: RM1.67. To be abreast with the current MGS 10-year yield, we conservatively increase our MGS assumption to 4.25% (from 3.75%) and post earnings adjustments, we raise our TP to RM1.67 (from RM1.54); this is based on FY23 DPU on targeted yield of 5.1%, derived from -1SD below 2-year historical average yield spread between Sunway REIT and MAGY10YR in view of its diversified portfolio. Maintain BUY.

Source: Hong Leong Investment Bank Research - 19 May 2022