Sunway REIT’s (SREIT) results came in within our expectations but below street forecasts. The REIT’s 3QFY20 realised net profit fell by 19.9% yoy (-15.9% qoq) to RM60.7m due to lower retail and hotel earnings, partly cushioned by the contribution from Sunway Campus and resilience in the office and services segments. No distribution was declared in 3QFY20 as management revised its income distribution payout to semi-annual (from quarterly). We raise our FY21-22E EPU forecasts by 2-3% after incorporating a lower finance cost following BNM’s recent rate cut. We roll forward our valuation horizon and raise our price target to RM1.65 (from RM1.57). Maintain HOLD.

3QFY20 Realised Net Profit Fell by 20% Yoy (-16% Qoq)

SREIT’s 3QFY20 realised net profit slipped by 19.9% yoy (-15.9% qoq) to RM60.7m due to lower revenue from the retail and hotel segments (Fig 2), mitigated by higher contributions from the services (largely due to the Sunway Campus acquired in 4QFY19) and office segments. SREIT’s retail revenue slipped by 11% yoy in 3QFY20 due to RM13.8m rental support granted to non-essential retail tenants during the MCO period. Elsewhere, its hotel revenue fell by 35% yoy due to the impact of Covid-19 and MCO.

Broadly, the Results Were Below Street But Within Our Expectations

SREIT’s 9MFY20 realised net profit were lower by 4% yoy at RM206.5m due to lower net property income from the retail (-7.2% yoy) and hospitality segments (-2.3% yoy), partly mitigated by higher contributions from the services segment (+152% yoy) due to contributions from Sunway Campus. Overall the results were within our but below market expectations. SREIT’s 9MFY20 realised net profit accounts for 83% of Affin Hwang and 72% of consensus full-year forecasts. We expect SREIT to report weak 4QFY20 earnings due to the MCO and Covid-19 pandemic.

Changing to Semi-annual Distribution

No distribution was declared for 3QFY20 as management revised its income distribution payout to semi-annual (from a quarterly payout) to free up cash should the need for cash arise. Overall, management remains cautious on the retail and hospitality markets. SREIT continues to provide rental assistance to the affected tenants (on a case-by-case basis) during the CMCO period, and may extend this to 2HCY20 should the need arise.

Raising FY21-22E EPU Forecasts on Lower Finance Cost

We maintain our revenue and NPI forecasts but raise our FY21-22E EPU forecasts by 2-3% after incorporating a 20-25bps reduction in its finance cost. To recap, BNM had cut Malaysia’s Overnight Policy Rate by 50 bps on 5 May to 2.00%. The cut is steeper than our expectations of 25bps cut.

Maintain HOLD With a Higher DDM-derived Price Target of RM1.65

We maintain our HOLD rating on Sunway REIT with a higher DDM-derived target price of RM1.65 (from RM1.57) after incorporating our earnings upgrade and rolling forward our valuation horizon. At 5.9% FY21E distribution yield, SREIT is trading below its 8-year average yield of 5.6%, which looks fair considering the challenging business environment and its heavy balance sheet. Upside risk: rapid improvement in market activity, strong earnings; downside risks are sharp earnings declines and an unfavourable outcome in the negotiations on hotel master lease renewals.

Source: Affin Hwang Research - 22 May 2020