Sunway REIT (SREIT) reported a strong set of results – 3QFY19 realised net profit grew by 9% yoy on higher revenue from all asset classes, translating to a higher DPU of 2.58 sen (second highest since listing). Cumulatively, 9MFY19 realised net profit slipped by 2% yoy due to weaker hotel contributions, cushioned by strong earnings from Sunway Pyramid Mall. Overall, the results are in line with the market and our expectations. Maintain BUY with a higher DDMderived target price of RM2.06 - we have lowered our cost of equity in anticipation of a stronger investor appetite for defensive assets.

A strong quarter – 3QFY19 realised net profit grew by 9% yoy / 14% qoq

SREIT’s 3QFY19 realised net profit grew 8.5% yoy to RM75.8m (+14.1% qoq), driven by higher revenue from all asset classes (Fig 2). Notably, Sunway Pyramid registered 4.8% growth in revenue (yoy) on higher turnover rent while higher occupancy rates lifted revenue from Sunway Resort Hotel & Spa, Menara Sunway and Sunway Putra Tower. Higher revenue from these assets and the recognition of a RM4.4m income guarantee for Sunway Clio Property have more than offset weaker revenue from other hotels, and lifted SREIT’s overall profitability. SREIT’s 3QFY19 DPU of 2.58 sen is its second highest since listing.

9MFY19 Realised Net Profit Slipped by 2% - Within Expectations

SREIT’s 9M19 net property income (NPI) grew by 2.8% yoy to RM328.5m on higher contributions from most asset classes (Fig 2) except the hotel segment that was affected by refurbishment of the ballroom and meeting rooms at Sunway Resort Hotel & Spa (finished at end-2018) and softer hospitality market conditions (intense competition). Nonetheless, the higher NPI from other asset classes mitigated the weaker hotels earnings. The lower 9MFY19 realised EPU (-1.6% yoy) translated to lower 9MFY19 DPU of 7.31 sen (-1.5%). Overall, the results are within market and our expectations; 9MFY19 realised net profit accounts for 74% of street and our full-year earnings forecasts.

Maintain BUY With a Higher TP of RM2.06

We maintain our earnings forecasts and BUY rating on SREIT with a higher DDM-derived target price of RM2.06. We have lowered our cost of equity to 7.9% (from 8.2%) in anticipation of higher investor demand for defensive yield plays. We continue to like SREIT for its diversified asset portfolio and resilient earning streams. At 5.4% FY20E yield, the stock remains attractive in view of its stable earnings and DPU. Downside risks are: (i) weaker-than-expected earnings from hotel and / or retail segments; and (ii) hiccups in the Sunway Carnival Shopping Mall expansion project.

Source: Affin Hwang Research - 3 May 2019