Sunway REIT’s FY22’s core net profit of RM326.0m (+98.6% YoY) were inline with ours and street expectations. The commendable performance was mainly driven by the robust recovery in retail and hotel segments arising from transition to endemicity and reopening of international borders. It was also aided by the opening of Sunway Carnival Mall’s new wing and phased reopening of Sunway Resort Hotel. We expect retail and hotel segments to deliver further improvements on the back of anticipated positive rental reversions from retail malls and improving hotel occupancy rates while awaiting further developments on exercises to fill up earnings void arising from its ongoing asset disposal. We maintain our BUY call and TP of RM1.68 based on FY23 DPU on targeted yield of 5.3%.

Within estimates. 4QFY22 core net profit of RM86.5m (-0.5% QoQ, +27.8% YoY) lifted FY22 sum to RM326.0m (+98.6% YoY). The results were within ours (103%) and street estimates (102%). 4QFY22 core net profit was arrived after excluding fair value loss of investment properties (RM31.3m) and taxation (RM9.3m) relating to deferred tax on unrealized fair value gain from disposal of investment property.

Dividend. CY22: DPU of 9.22 sen vs 4.43 sen SPLY. (4Q22: 5.0 sen vs 4Q21: 2.8 sen)

QoQ. Revenue was up +5.1% due to better performance from retail (+5.8%) and hotel segments (+10.4%). The improvement from retail was driven by contribution from Sunway Carnival Mall’s new wing and stronger retail footfall and tenant sales across its retail properties, which in turn elevated turnover rent. Meanwhile, its hotel properties saw continued recovering occupancy rate in tandem with the reopening of international borders and year-end tourism season. These subsequently led to an increased NPI (+4.6%). However, core net profit remained flattish (-0.5%) due to rising finance costs (+15.9%).

YoY/YTD. Top line grew (+26.4% YoY, +41.2% YTD), mainly fueled by recovery from retail and hotel segments. For retail (+26.3% YoY, 58.4% YTD), the increment was boosted by significant decline in rental support in FY22 as well as recovering footfall and tenant sales. Meanwhile, Hotel (+107.1% YoY, +61.9% YTD) was bolstered by the phased reopening of Sunway Resort Hotel since May 2022 and overall improved occupancy arising from the gradual relaxation of travel restrictions. In turn, NPI expanded (+29.6% YoY, +60.9% YTD). Despite incurring higher finance costs (+41.5% YoY, +15.0% YTD) owing to increasing interest rates, core bottom line registered remarkable showing (+27.8% YoY, +98.6% YTD).

Occupancy and gearing. Sunway REIT has 20 properties in its portfolio. Occupancy for the hotel segment recovered to 54% (FY21: 30%; excluding Sunway Resort Hotel due to refurbishment). Retail and office segment occupancy remained sturdy at 96% and 83% respectively. Gearing stood at 37.6%.

Retail. We believe the footfall and tenancy sales for its shopping malls should remain buoyant in 1H23, spurred by festive seasons and holidays. Rental reversion stood at positive mid-single digit in 2022 for its retail portfolio and management targets to achieve the same level of reversion in FY23. To note, 59% of NLA from Sunway Pyramid is due for expiry in 2023, which we believe the renewal rate will be robust.

Hotel. Hotel segment continues to recover on a gradual pace. Barring unforeseen circumstances, the occupancy level of its hotel properties should slowly return to pre pandemic level by 2024. We believe the ADR for Sunway Resort Hotel (refurbishment due for full completion in 1Q23) should stay slightly above RM600 with targeted 70% occupancy rate in 2023. Although the positive impact may not be significant given its limited exposure to Chinese tourists, we think China’s border reopening should bode well for its hotel assets and the hospitality sector as a whole.

Hunting assets to fill earnings void. While we are wary in view of the temporary earnings void attributed to the ongoing disposal of medical buildings, management is on the lookout for assets mainly from the industrial and services (i.e. education) sectors with NPI yield above 7% (vs 6% from existing medical buildings).

Forecast. While pending the completion of medical buildings disposal exercise, we maintain our forecasts as results were broadly in line.

Maintain BUY, TP: RM1.68. Our TP is based on FY23 DPU on targeted yield of 5.3%, 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 - 31 Jan 2023