Sunway REIT (SREIT)’s 1QFY19 realised net profit grew by 15% qoq to RM73m (-7% yoy), within market and our expectations. The sequential earnings growth was driven by higher contribution from Sunway Pyramid Mall and recognition of partial income support for Sunway Clio while yoy decline was attributable to the ongoing refurbishment at Sunway Resort Hotel. Maintain BUY with an unchanged price target of RM1.95. SREIT’s FY19E yield of 5.6% looks attractive, considering its diversified asset base and defensive rental income.

1QFY19 Realised Net Profit Grew by 15% Qoq on Higher Revenue

SREIT’s 1QFY19 revenue grew by 5.5% qoq on higher contributions from the retail (+3.6% to RM104.9m) and hotel segments (+20.4% to RM22.6m). Notably, Sunway Pyramid Mall achieved a record quarterly revenue of RM80.3m (+4.5% qoq) due to better turnover rent in the quarter. Elsewhere, Sunway Clio Property reported a higher revenue, partly attributable to the recognition of RM4.4m partial income support (the difference between total annual net property income and guaranteed NPI of RM20.2m).

Weaker Earnings Yoy Due to Refurbishment of Sunway Resort Hotel

Excluding the newly acquired Sunway Clio Property, the ongoing refurbishment of grand ballroom and function rooms at Sunway Resort Hotel and soft hospitality market has led to a lower 1QFY19 hotel revenue (exclude Clio) of RM14.1m (-39% yoy). The lower hotel revenue, coupled with lower rental in Sunway Putra Mall and higher effective interest rate had translated to a lower realised EPU (-8% yoy) and a 7% decline in DPU. Nonetheless, the results were within market and our expectations – 1QFY19 realised profit account for 24-25% of the street and our full year forecasts.

Cautious FY19 Outlook

Looking into FY19, management expects flattish growth in the retail segment and a soft hospitality market. However, management sees improvement in the overall occupancy rate for the office segment, attributable to continued improvements in Sunway Putra Tower and Wisma Sunway.

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

We reiterate our BUY rating on SREIT. We like its diversified asset portfolio and defensive revenue stream. At 5.6% FY19E distribution yield, the valuation remains attractive. Downside risks: (i) weaker-than-expected earnings due to lower visitorships to its hotels / weak retail spending; and (ii) successive interest rate hikes.

Source: Affin Hwang Research - 2 Nov 2018