Sunway REIT (SREIT) reported a good set of results - 9MFY18 realised net profit grew by 7% yoy to RM219m on higher contributions from most asset classes, translating to a higher 9M18 DPU of 7.42 sen (+7% yoy). The results were above our forecasts but within market expectations. Maintain BUY with a higher DDM-derived target price of RM1.95 (from RM1.90), incorporating 5% FY18-20E earnings upgrades but higher cost of equity. At 5.9% FY19E distribution yield, SREIT’s valuation looks attractive, considering its diversified asset portfolio and resilient earnings stream.

Higher 9M18 Realised Profit of RM219m (+7% Yoy), Above Expectations

SREIT reported a higher 9M18 realised net profit of RM219m (+7% yoy) on higher net property income from most asset classes – retail (RM226m, +4% yoy), hotel (RM61m, +40%) and others (RM21m, +26%). The higher net property income was driven by rental growth (retail), higher occupancy (hotel, office), acquisitions of new assets (industrial, hotel) and completion of refurbishment exercise (hotel). Overall, the results were above our expectations (9M18 earnings account for 79% of our full year forecasts) but within street expectations. Key variance from our projections were stronger than expected revenue from several properties (Sunway Pyramid Shopping Mall, Sunway Putra Hotel and Sunway Hotel Georgetown).

Sequentially, 3Q18 Realised Profit Marginally Lower

Sequentially, SREIT’s 3Q18 realised net profit fell by 0.3% to RM70m on the back of a flattish revenue. Higher net property income from retail assets (+9% qoq to RM77m) was offset by a decline in hotel revenue (-24% to RM17m). Positively, management highlighted that the tenant sales at Sunway Pyramid grew by 13% yoy in Jan-Feb18 and its occupancy has inched up to 99%.

Raising FY18-20E EPU by 5%, Target Price to RM1.95 (from RM1.90)

We lifted our FY18-20E EPU forecasts by 5%, incorporating higher net property income from several properties (Pyramid Shopping Mall, Putra Hotel, Hotel Georgetown). In tandem, we are raising our DDM-derived target price to RM1.95 (from RM1.90), after incorporating: (i) our earnings upgrade; (ii) rolling forward valuation horizon to FY19E; and (iii) higher cost of equity assumption of 8.2% (from 7.9%), in view of its heavy balance sheet (38% gearing ratio) and the higher execution risk in relation to its property development project (SREIT is undertaking a RM339m expansion project to add 330,000sf of NLA at the Sunway Carnival Mall).

Maintain BUY

We reiterate our BUY rating on SREIT. We continue to like SREIT for its strong management team and diversified asset portfolio. At 5.9% FY19E distribution yield, the valuation looks attractive, considering its lower earnings risks (vis-à-vis other MREITs) due to a diversified revenue stream. The downside risks to our positive view on SREIT include: (i) rapid, successive interest rate hikes (we pencil in another Overnight Policy Rate hike for 2H18); (ii) further deterioration in retail mall market condition, leading to weaker-thanexpected earnings; and (iii) lower-than-expected visitorships to its hotels.

Source: Affin Hwang Research - 4 May 2018