• Sunway REIT (SREIT)reported a modest set of results – FY20 realised net profit fell by 19% yoy to RM228m while DPU declined by 24% to 7.33 sen on weakness in its hotel and retail segments.
• FY20 results were below market and our expectations due to weaker than expected contribution from retail and hotel segments.
• In view of weakness in the hotel segment and slower improvement in retail segment, we cut our FY21-22E earnings by 7-8%. Maintain BUY with a lower target price (TP) of RM1.75.

4QFY20 realised profit fell 64% qoq to RM22m, below expectations

SREIT reported a 63.9% qoq decline in realised net profit to RM21.9m on the back of a lower revenue of RM104.9m (-25.5%), attributable to lower retail rental (due to rental support for tenants), lower car park income and loss of business from the hotel segment. Meanwhile, NPI margin was resilient at 74% due to cost containment measures undertaken in the quarter which help cushioning the lower revenue.

Cumulatively, FY20 realised profit slipped 19% yoy to RM228m, DPU fell 24% yoy

SREIT’s FY20 realised net profit fell by 19% yoy to RM228.4m due to lower revenue from the retail and hotel segments, partly cushioned by stable contributions from offices and healthcare assets and full year contribution from Sunway University and College Campus acquired in April 2019. The FY20 full year DPU fell by 23.6% to 7.33 sen due to lower underlying profit and lower payout ratio of 95% (FY19A: 100%). Moving forward, SREIT is dedicated to distribute at least 90% of it distributable income. Overall the results were below market and our expectations due to weaker than expected contribution from the retail and hotel segments. SREIT’s FY20 realised net profit accounts for 88% of consensus and 92% of Affin Hwang’s full-year forecasts.

We are cautious on the hotel and retail segments; other assets look stable

Looking into FY21, we expect the hotel segment to remain weak due to prolonged negative impact from the COVID-19 pandemic. Management has taken this opportunity of low occupancy to refurbish its Sunway Resort Hotel and Spa, which was due for a face-lift. We also note that the 3 hotel tenancies (Sunway Resort, Sunway Pyramid and Sunway Hotel Seberang Jaya) was renewed in July with no minimum guaranteed rent. Instead, the new agreements include a higher variable rent comprising of base rent of 20% of revenue plus 90% (previous 70%) of gross operating profit less master lease expense. Elsewhere, retail segment should see gradual improvement while the office, healthcare, education, as well as industrial assets should provide some stability in revenue

Cutting FY21-22E EPU forecasts by 7%-8%, maintain BUY with a lower TP 

We cut our FY21-22E EPU forecasts by 7%-8% after incorporating (i) weaker hotels’ segmental revenue and profit due to prolonged restrictions on cross-border travelling; (ii) the refurbishment of Sunway Hotel Resort and Spa in FY21; and (iii) slower-thanexpected recovery in the retail segment. We have also lowered our dividend payout ratio expectations in FY21-22 due to the cash preservation stance by management. Nonetheless, we maintain BUY with a lower price target of RM1.75 (from RM1.82). We continue to like SREIT for its diversified asset portfolio, experienced management and strong sponsor. Downside risks: (i) successive interest rate hikes; (ii) weaker-thanexpected earnings due to lower visitorships to its hotels.
 

Source: Affin Hwang Research - 4 Aug 2020