Sunway REIT’s 2QFY22 core net profit of RM69.5m (-16.4% QoQ, +143.5% YoY) brought 1HFY22’s sum to RM152.7m (+152.5% YoY). The results were inline with ours and consensus expectations at 50%. DPS of 4.20sen was declared in 1HFY22. The strong performance in 1HFY22 was mainly due to positive showing across all business segments, due to the lifting of movement restrictions and transition to endemicity, which spurred the recovery in footfall and tenant sales of its retail malls as well as occupancy rate of its hotel. We keep our forecasts as results were inline. Maintain BUY call with an unchanged TP of RM1.67 based on targeted yield of 5.1% derived from -1SD below 5-year historical average yield spread between Sunway REIT and MAGY10YR.

Inline. 2QFY22 core net profit of RM69.5m (-16.4% QoQ, +143.5% YoY) brought 1HFY22’s sum to RM152.7m (+152.5% YoY). The results were in line with ours and consensus expectations at 50%.

Dividend. Declared 2QFY22 DPS of 4.20 sen per share (semiannual dividend) vs 1.63 sen per share SPLY.

QoQ. Revenue shrunk to RM144.5m (-6.1%). The decline was mainly due to the fall in revenue from the hotel segment (-67.7%), arising from the cessation of minimum guaranteed rent from Sunway Putra Hotel as well as guaranteed net property income (NPI) for Sunway Clio Hotel in the preceding quarter. Meanwhile, property operating expenses rose to RM37.6m (+7.3%), primarily attributable to higher quit rent, assessment and insurance expenses (+40.7%). As a result, core net profit declined to RM69.5m (-16.4%).

YoY. Top line increased to RM144.5m (+39.8%), mainly supported by stronge r contribution from (i) retail +73.0%; improved performance across retail properties, especially Sunway Pyramid Mall due to robust tenant sales and shoppers footfall with lifting of movement restrictions, coupled with marginal rental assistance, (ii) Office +2.4%; underpinned by stable occupancy rate for its office properties, (iii) Total services revenue +2.8%; annual rental reversion for Sunway Medical Centre and Education assets as well as (iv) total industrial & others revenue +10.0%; increase in rental in accordance to master lease agreement. This was however, dragged down by hotel segment (-31.1%) which stemmed from the absence of minimum guaranteed rent for Sunway Putra Hotel. Accordingly, NPI was up 71.4%, partly due to lower overall property opex (-8.3%). Meanwhile, overhead and finance costs also remained flattish, which led to a jump in core net profit to RM69.5m (+143.5%).

YTD. Revenue rose to RM298.5m (+43.7%). The improvement was essentially bolstered by better performance across all business segments, namely retail (+78.0%), hotel (+6.2%), office (+1.6%), services (+3.0%) and industrial & others (+10.0%) due to the aforementioned factors, saved for hotel. Hotel revenue expanded 6.2%, driven by overall occupancy contributed by the increased domestic leisure, business travel as well as return of physical events and conferences at its hotel properties. Alongside operating expenses declining 7.2%, these led to an improvement in NPI (+74.6%) to RM225.8m. That said, core net profit grew at a much faster clip (+152.5%) given largely stable overhead and finance expenses.

Occupancy and gearing. Sunway REIT has 19 properties in its portfolio. Occupancy for the hotel segment improved to 45% (FY21: 32%; excluding Sunway Resort Hotel due to refurbishment) thanks to relaxation of movement restrictions and transition to endemicity. Retail and office segment occupancy remained sturdy at 97% and 84% respectively. While services, industrial and others segments’ occupancy remained at 100%. Gearing stood at 36.8%.

Outlook. As footfall and tenant sales have returned to pre-pandemic levels for its retail segment, we expect its momentum to remain resilient with the opening of Sunway Carnival Mall’s new wing. Also, the rental rebate is expected to trend lower amidst improvement in tenant sales. Similarly, we foresee hotel segment to continue delivering healthy improvement arising from better occupancy and average room rates. The gradual reopening of Sunway Resort Hotel is also timely to capitalize on the strong appetite for domestic travel and the visitation of foreign tourist as international borders have reopened.

Forecast. We maintain our forecasts as results were broadly in line.

Maintain BUY, TP: RM1.67. Our TP is based on FY23 DPU on targeted yield of 5.1%, derived from -1SD below 5-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 Aug 2022