We came away from our recent meeting with SunREIT, feeling optimistic over its outlook for FY23 due to positives from multiple fronts. Management reiterated its retail segment is expected to stay buoyant, given sustained turnover rent and foreign tourists arrival. Similarly, hotel will continue its recovery path, lifted by the gradual revival of tourism sector with comfortable level of labour capacity should inbound tourists return to pre-pandemic level; full reopening of Sunway Resort Hotel should give another leg up to the segment. Office is anticipated to log positive rental reversion, which we deem commendable given the subdued office market. Forecasts wise, increased payout ratio assumption and tweak FY23/24 earnings by +3.4%/+3.1%. Also, introduced FY25 earnings. Maintain BUY with higher TP: RM1.87 (from RM1.68).

FY22 recap. To recap, SunREIT chalked up robust financial performance in FY22 with top line and core net profit jumped 41.2% and 98.6% YoY due to significant decline in rental assistance, recovering footfall and tenant sales of retail malls. It was also aided by contribution of Sunway Carnival Mall’s new wing and phased reopening of Sunway Resort Hotel. To note, tenant sales in 2022 is 10-15% higher as compared to 2019 (prepandemic).

Turnover rent to remain strong. With tenancy sales exceeding pre-pandemic level, management reiterated that the retail performance is likely to remain buoyant in 2023 due to further upside arising from the arrival of international tourists. Despite the general notion that “revenge spending” is likely to dissipate this year, management thinks contribution from turnover rent will remain stable at high single digit of total rental income due to continuous effort in enhancing turnover rent mix in addition to the usual rental step up.

Stars aligning for hotel assets. While tourist numbers are recovering in Malaysia, there is still a significant gap compared to pre-pandemic levels – 2022/2023 target of 9.2m/16.1m vs 2019’s 26.1m. This implies further upside for SunREIT’s hotel segment arising from the eventual full revival of the tourism sector, especially from China. Management takes comfort in its labour capacity even if the tourists’ arrival returns to pre-pandemic level this year. There is also minimal increase in its labour costs vis-à-vis 2019. Moreover, the impending full reopening of Sunway Resort Hotel in 1Q23 is expected to give another leg up to the hotel segment. MICE activities in hotels are set to improve further as corporates relook to host their events in a physical setting.

Expect no negative surprise for offices. Office segment is expected to remain stable with low positive single digit rental reversion for its office properties in 2023, which we deem commendable as office owners are coping with intense competition. Meanwhile, occupancy rate of Sunway Tower is set to rise to 40% (from 31%) as Sunway Xfarms commences its tenancy in phases while Wisma Sunway foresees no issue in renewing its 78% expiring NLA (single tenant) in FY23.

Transcend 2027. Stripping out its medical buildings that are due for disposal in 1Q23 (RM370m), the portfolio value of SunREIT stands at c. RM8.7bn. In its TRANSCEND 2027 strategy, SunREIT targets to grow its asset value to RM14-15bn by 2027 with a particular focus on expanding its services and industrial segments to 20-30% mix of TAV. This implies c.60-70% increase from its current TAV in 5 years – we reckon this may be a tad high, but could still be attainable given the assets pipeline from its sponsor (Sunway Velocity Integrated Development, Sunway Giza Shopping Mall among others).

Forecast. We increased our payout ratio assumptions as management aims to revert to near 100% moving forward. We also tweaked our FY23/24 core net profit forecasts (+3.4%/+3.1%) upon some housekeeping adjustments and introduce our FY25 earnings at RM375.0m.

Maintain BUY; TP: RM1.87. Post adjustments and after rolling forward of valuation year to FY24f, our TP increases to RM1.87 (from 1.68). Our TP is based on FY24 DPU on targeted yield of 5.3%, derived from -1SD below 5-year historical average yield spread between Sunway REIT and MAG10YR in view of its diversified portfolio and robust track record. Reaffirm BUY.

Source: Hong Leong Investment Bank Research - 2 Mar 2023