Sunway REIT (SREIT) reported a modest set of results – 6MFY19 realised net profit slipped by 6% yoy to RM139m due to weaker hotel income, attributable to refurbishment at Sunway Resort Hotel & Spa, as well as softer demand. Nevertheless, higher NPI from other asset classes (retail, office, industrial, medical centre) partially cushioned the weaker hotel earnings. Overall, the results are within market and our expectations. Maintain BUY. At 5.8% FY20E distribution yield, SREIT’s valuation looks attractive, considering its diversified asset portfolio and resilient earnings stream.

Weaker 6M19 realised net profit of RM139.4m (-6%), within expectations

SREIT’s 6M19 net property income (NPI) grew by 0.2% yoy to RM214.7m on higher contributions from most asset classes (Fig 2), which more than offset a steep decline in hotels NPI (-17% yoy). Higher borrowing costs arising from additional loans incurred for the acquisition of Sunway Clio Property had resulted in lower realized net profit (-6% yoy) and a decline in DPU (-6% to 4.73 sen). Overall, the results are within market and our expectation – SREIT’s 6M19 realised net profit accounted for 47-48% of street and our full year earnings forecasts. We expect stronger earnings in 2HFY19, driven by seasonally stronger retail revenue and a recovery in hotel contribution following the completion of refurbishment at Sunway Resort Hotel & Spa in late-2018.

Lower 2QFY19 Earnings Due to Lower Profit From Sunway Clio / Hotel

SREIT’s 2QFY19 realised net profit fell by 9% qoq to RM66.4m, attributable to: (i) lower profit from Sunway Clio Property; recall that Sunway Clio’s 1QFY19 NPI was boosted by RM4.4m of partial income support arising from the difference between total annual NPI and guaranteed NPI by the vendor; and (ii) lower NPI from the hotel segment, affected by ongoing refurbishment at Sunway Resort Hotel & Spa and lower group corporate booking at Sunway Putra Hotel.

Maintain BUY With An Unchanged TP of RM1.95

SREIT’s earnings weakness in 6M19 is largely within market and our expectations, the completion of refurbishment at Sunway Resort Hotel & Spa should lift 2H19’s earnings. We maintain our earnings forecasts, BUY rating and DDM-derived price target of RM1.95. We continued to like SREIT for its diversified asset portfolio. Downside risks are: (i) weakerthan-expected earnings from hotel and / or retail segments; and (ii) hiccups in the Sunway Carnival Shopping Mall expansion project.

Source: Affin Hwang Research - 15 Feb 2019