• March retail sales and car count have returned to about 80% of pre-Covid 19 levels, implying that a retail recovery is underway
• However, we remain cautious of hotel earnings (16% of FY2020 NPI) given the still-weak tourism activity and an absence of guaranteed rent in 3 of its prominent hotels
• Maintain HOLD on SREIT with a lower DDM-based target price of RM1.48 as we turn more cautious of the pace of recovery in the hotel segment

Retail Recovery Is Underway

Following the allowance of inter-district travels in early March 2021, Sunway malls are seeing higher foot traffic and tenant sales at about 80% pre-Covid 19 levels. As such, we expect the gradual recovery in tenant sales to translate to lower rental assistance in the coming quarters.

Hotel Segment to Remain Weak

SREIT’s hotel earnings are expected to remain soft in the near term due to (i) prolonged interstate travel restrictions; (ii) absence of cross-border travels and (iii) Sunway REIT’s hotels’ lease renewals with the absence of guaranteed rent. Given the rising concern of a 4th wave of Covid-19 in Malaysia and potential Sunway Putra Hotel lease renewal with the absence of guaranteed rent, we turn more cautious of the pace and quantum of recovery in the hotel segment.

Office asset and maiden contribution from Pinnacle Sunway to the rescue

We expect the office segment to remain stable in the medium-term horizon as we do not anticipate the work-from-home trend to have a meaningful impact on occupancy. Meanwhile, maiden contribution from Pinnacle Sunway post its acquisition in November 2020 should further boost earnings. Elsewhere SREIT’s other asset segment’s earnings should remain stable in 2021.

Maintain HOLD With a Lower Target Price of RM1.48

We lower our FY21E-FY23E earnings by 1-4% as we turn more cautious of the recovery pace in the hotel segment, earning weakness from the hotels with the absence of minimum guarantees and renewal of Sunway Putra Hotel with no guaranteed rent. Overall, we maintain HOLD on SREIT with a lower target price of RM1.48. At 5.4% 2022E yield, the stock is trading within its 5-year historical average, which looks fair. Key risks to our call includes (i) pace of economic recovery; (ii) visitorship to its hotels; and (iii) change in interest rates.

Source: Affin Hwang Research - 21 Apr 2021