Sunway REIT (SREIT) reported a moderate set results – FY19 realised net profit grew by a marginal 0.1% yoy on higher retail earnings and maiden contribution from Sunway Campus, more than offset weaker hotel contributions. Overall, the results were in line with market and our expectations – earlier-than-expected earnings contribution from Sunway Campus has made up for a weak hotel earnings. Maintain BUY with a higher price target of RM2.08 after incorporating Sunway Campus. We continue to like SREIT for its 5.4% FY20E yield and diversified asset portfolio.

FY19 Realised Net Profit Grew 0.1% to RM282.3m, Largely in Line

SREIT reported a moderate set of results. FY19 realised net profit grew 0.1% yoy to RM282.3m on higher contribution from all segments except hotels (Fig 2). SREIT’s net property income was also boosted by maiden contribution from Sunway University & College Campus acquired in April 2019. In tandem, SREIT’s full-year dividend grew by 0.2% yoy to 9.59 sen. SREIT’s FY19 realised net profit make up 98% of street and our full-year forecast – the results were largely in line, earlier-than-expected earnings contributions from Sunway Campus has made up for weak hotel earnings.

Results Were Seasonally Weaker

SREIT’s 4Q19 realised net profit came in at RM67.2m (-11.5% qoq, +6.1% yoy). The earnings were sequentially weaker due to the lower profit contributions from the hotel and retail business, partly cushioned by the maiden contribution from Sunway University & College Campus (RM7.1m). The sequential decline in retail earnings by -4.4% qoq was largely due to seasonality while the sharp decline in hotel profit by -38% qoq was due to the recognition of a RM4.4m income guarantee for Sunway Clio Property in the prior quarter.

Stable Outlook for Retail, Cautious on Hotels

Looking into FY20, management expects the retail segment to register modest growth driven by higher contribution from Sunway Pyramid but are cautious on the hotel segment. Elsewhere, management expects effective leasing strategies to improve office segment’s performance.

Tweaking FY20-21E EPU Forecasts by 0.3%-0.5%

We tweak our FY20-21E EPU up by 0.3%-0.5% after incorporating: (i) the earnings and acquisition costs relating to the Sunway Campus acquisition and; (ii) weaker hotel contributions due to the weak market condition.

Maintain BUY With a Higher TP of RM2.08

In tandem, we have revised up our DDM-derived target price to RM2.08 (from RM2.06). Maintain BUY. We continue to like SREIT for its 5.4% FY20E yield and diversified asset portfolio. Downside risks are weaker than expected hotel / retail earnings and hiccups in the Sunway Carnival Shopping Mall expansion project.

Source: Affin Hwang Research - 9 Aug 2019