Sunway REIT (SREIT)’s FY18 realised net profit grew by 4.2% to RM282m on the back of higher revenue, driven by higher contribution from all asset classes. The results were within market and our expectations. Maintain BUY with an unchanged price target of RM1.95. We like SREIT for its diversified asset portfolio and resilient earnings stream.

FY18 Realised Profit Grew 4.2% to RM282m, Within Expectations

SREIT reported a modest set of results, FY18 revenue grew by 7.2% yoy to RM560m on higher contributions across all asset classes, driven by acquisitions (Sunway Clio, Shah Alam 1), higher occupancy and positive rental reversions. In tandem, FY18 realised net profit grew by 4.2% to RM282m, within consensus and our expectations. Management has declared 2.15 sen DPU for 4Q18 (-5.3% yoy); FY18 DPU came in higher at 9.57 sen, from 9.19 sen in FY17.

Sequentially, 4Q18 Earning Was Lower Due to Seasonality

SREIT’s 4Q18 realised net profit came in weaker at RM63.3m (-9.4% qoq, -5.2% yoy). Sequentially, the earnings decline was due to seasonality. 4QFY18 is typically a weak quarter for SREIT’s retail and hotel assets. Compared to 4Q17, the weaker earnings was due to higher marketing cost at Sunway Carnival, lower rental for Sunway Putra Mall and lower occupancy at Sunway Resort Hotel, partly mitigated by higher contributions from Sunway Pyramid Hotel, Sunway Putra Tower and Sunway Putra Hotel.

Stable Outlook for Retail, Higher Competitions for Hotel

Looking into FY19, management expects the retail segment to register a modest growth, underpinned by stable average occupancy across the malls. For the hotels, refurbishment activities at Sunway Resort Hotel and higher competition from incoming hotel supply may limit earnings growth. Lastly, management expects gradual improvement in office occupancy, driven by improvement at Sunway Putra Tower and Wisma Sunway.

Maintain BUY With An Unchanged DDM-derived Price Target of RM1.95

We trimmed our FY19-20E EPU forecasts by 0.2%-0.3% after incorporating SREIT’s actual FY18 results. Maintain BUY with an unchanged price target of RM1.95. We continued to like SREIT for its diversified asset portfolio – diversified. Downside risks: (i) successive interest rate hikes; (ii) weaker-than-expected earnings due to lower visitorships to its hotels.

Source: Affin Hwang Research - 10 Aug 2018