Sunway REIT (SREIT) reported a decent set of results – 6MFY20 realised net profit grew by 4.6% yoy, driven by the maiden contribution from Sunway Campus and a higher contribution from its Sunway Resort Hotel and Spa. The results were within market and our expectations. Management does not expect the coronavirus outbreak to have a material impact on its retail earnings for now but is cautious on the hotel segment. Nonetheless, we believe the hotels’ master leases should cushion the downside risks during this difficult time. Maintain BUY: We continue to like SREIT for its 5.3% FY20E yield, diversified asset portfolio and strong asset injection pipeline.

6MFY20 realised net profit of RM146m (+4.6% yoy) is within expectations

SREIT reported a decent set of numbers – 6MFY20 realised net profit grew by 4.6% yoy, on the maiden contribution from Sunway University & College Campus (RM17.2m) and a higher post-refurbishment contribution from Sunway Resort Hotel and Spa (RM14m +101% yoy) that more than offset weaker retail NPI (due to normalisation of advertising & promotion and maintenance costs against a low base in 6MFY19). Overall, the results were within market and our expectations. SREIT’s 6MFY20 realised earnings made up 47% of the street’s and 50% of our full-year forecasts.

Sequentially, SREIT’s 2QFY20 Realised Net Profit Slipped by 2.1%

SREIT’s 2QFY20 core net profit slipped by 2.1% qoq to RM72.1m due to higher A&P and maintenance costs for Sunway Pyramid and Sunway Carnival Mall, and lower revenue from Sunway Clio.

Coronavirus Outbreak: Minimal Impact on Retail, Cautious on Hotels

Management does not expect the coronavirus outbreak to have a material impact on its retail business for now, barring a prolonged and / or worsening of the outbreak. However, management cautioned that the outbreak may have a larger impact on its hotel business. Management has lowered its room rates in a bid to improve occupancy.

Maintain BUY With An Unchanged DDM-derived Price Target of RM2.00

We maintain our earnings forecasts, BUY rating and 12-month price target of RM2.00. SREIT’s master lease agreements with the vendors should cushion its hotels’ earnings downside during this difficult time. We recommend that investors look beyond the possible near-term earnings blip and stay invested. At 5.3% FY20E yield, SREIT’s valuation looks attractive vis-à-vis the other MREITs. Downside risks are weak retail spending, lower economic growth and reversal in the global yield trend.

Source: Affin Hwang Research - 14 Feb 2020