Sunway REIT (SREIT) reported a solid set of results – 6MFY18 realised net profit grew by 11% yoy on higher revenue from retail and hotel segments, broadly within market and our expectations. In tandem, management has raised 6M18 DPU by 11% yoy to 5.05 sen (99% payout ratio). Maintain BUY. SREIT is our preferred pick among MREITs for its diversified asset portfolio. At 5.4% 2018E distribution yield, its valuation looks attractive, considering its lower earnings risk vis-à-vis other MREITs.

6M18 Net Property Income Grew by 13% on Higher Rental /occupancy

SREIT’s 6MFY18 net property income grew by 13% yoy to RM214m on the back of a higher revenue (+11% yoy to RM283m), driven by increased revenue contribution from Sunway Pyramid Shopping Centre (+6% yoy on positive rental revisions) and the hotel business. Sunway Pyramid Hotel registered higher NPI of RM7.9m in 6M18 (vs RM0.6m in 6M17) following the completion of its refurbishment works in Jun17. Elsewhere, Sunway Putra Hotel achieved higher occupancy of 75% (from 71%) due to one-off contribution from SEA Games and stronger corporate demand.

Earnings Were Sequentially Weaker Due to Higher Maintenance Costs

Sequentially, SREIT’s 2QFY18 realised net profit fell by 11% to RM70m - its revenue was flat at RM141m (+0.2% qoq) but operating costs increased by RM7.9m to RM38m (+26%), attributable to higher maintenance costs (ie. repainting of carparks at Sunway Pyramid Shopping Mall) and higher provision for doubtful debts.

Results Were Broadly Inline, Expect Weaker 2HFY18

SREIT’s 6M18 realised net profit accounts for 53%-54% of consensus and our full-year earnings forecasts. We deem the results to be inline as we expect seasonally weaker earnings from hotels and higher finance costs to weigh on 2H18’s profitability. To recap, 89% of SREIT’s RM2.8bn debt portfolio is shortterm debts. The recent hike in the Overnight Policy Rate (OPR) should lead to higher future finance costs, we believe.

Maintain BUY With An Unchanged DDM-derived TP of RM1.90

SREIT remains our preferred pick among MREITs for its diversified asset portfolio - diversified, defensive earnings are a virtue in the current asset cycle. Its retail-centric peers are facing a tough time, which could lead to a switch into SREIT and compress its yields (5.4-5.6% on our FY19-20E forecasts). The downside risks to our positive view on SREIT include: (i) successive interest rate hikes; (ii) further deterioration in the retail mall market condition.

Source: Affin Hwang Research - 7 Feb 2018