Both 1QFY18 Net Property Income (NPI) and Net Realised Income (NRI), at RM111m and RM79m respectively came in at 28-29% of ours and consensus FY18E expectations, which surprise us on the upside. This was due to lower maintenance cost in the quarter and surprisingly stronger performance from its hotel segment. A DPS of 2.67sen was also announced on the back of the results. We are maintaining our BUY call, as we are still positive on the growth prospect of its existing assets and the potential asset injection from its sponsor, which provides a decent growth catalyst for the stock.

Lower Maintenance Help Boost Retail Segment

The retail segment is still the largest contributor for the REIT, as 71% of the NPI is derived from the segment. Although revenue for the segment only grew by 3.9% yoy for 1QFY18, overall NPI grew by more than 9.5% yoy, as NPI margin expended by more than 400bps, due to lower maintenance cost. Despite management guiding that the lower cost will likely normalise in the coming quarters, we are still positive on the performance as the current secured occupancy rate of its malls are now above 90%.

Hotel Segment Benefited From the SEA Games

The NPI for the segment grew by 44% yoy to RM23m in 1QFY18, benefiting from the low base effect as Sunway Pyramid Hotel was fully reopened in June 2017 post its refurbishment, and also higher occupancy and daily rate due to higher demand from the ASEAN games in Aug and Sep for Sunway Putra Hotel. There could be upside risk to our numbers, if the strong demand in 1QFY18 sustains for the whole year.

Keeping Our BUY Call With An Unchanged TP at RM2.05

We are maintaining our BUY call on the stock, as we believe that the 1QFY18 results reinforce our investment thesis that the growth outlook of Sunway REIT (SREIT) from its existing assets remains intact. We believe SREIT can also spend around RM350-400m to acquire new assets, either from its sponsor, Sunway Berhad, or 3rd party before the need to raise new equity, providing further upside for existing shareholders. Our DDM-based TP is also unchanged at RM2.05.

Source: Affin Hwang Research - 1 Nov 2017