Period     2Q13/1H13 

Actual vs. Expectations     1H12 realised net income (RNI) of RM108m was within expectations, making up 52% of consensus FY12E RNI of RM206m and 53% of our RM202m. 

Dividends   2Q12 GDPS of 2.19 sen declared, of which 0.36 sen is non-taxable, implying 1H12 GDPS of 4.22 sen which is line with expectations. In addition to 2Q12 dividends, the group is paying out advance dividends of 0.97 sen (0.14 sen non taxable) for 1 Jan - 13 Feb 2013 to ensure minimal dilution impact for pre-placement shareholders. So total payout will be 3.16 sen. 

Key Results Highlights       YoY, 1H13 RNI grew by 14% on effective capital management initiatives rather than NPI growth (+1% YoY).  1H13 average cost of debt fell to 3.73% from 4.67% in 1H12. SunREIT's retail components, e.g. Sunway Pyramid and Sunway Carnival continued to fare well, with NPI growth of 6% YoY and 28% YoY each. However, its hospitality and office components are facing challenges due to lower leisure spending, companies holding back corporate functions and fall in office occupancy rates. 

QoQ, RNI grew by 8% due to an improved NPI by 7% QoQ, which was largely driven by positive rental reversions from Sunway Pyramid and Sunway Carnival. 

Outlook    SunREIT remains convicted on growth in its retail segment, but is cautious on its hospitality and office segment. We expect FY13E CAPEX to be RM160m which is mainly for SPP Mall refurbishments. All tenants for SPP Mall are expected to move out by April, leading to the fall in occupancy rate for SPP Mall to 73% from 84% a year ago. Management also guided potential new acquisitions this year, which could be its parent Sunway Berhad's Sunway University, Sunway Giza, or Monash University etc.

Contribution from the newly acquired Sunway Medical Centre is expected to cushion the fall in NPI from SPP Mall refurbishment. Placement of up to RM320m should take place soon. 

Change to Forecasts    No changes to our FY13-14E NDPS forecasts of 7.1 send and 7.3 sen (post placement), implying yields of 4.7% and 4.9% respectively.  

Valuation    Upgrade TP to RM1.61 (post placement) from RM1.51 based on a lower target net dividend yield of 4.4% vs. 4.7% previously. We have lowered our 10-year MGS assumption to 3.0% from 3.3% on heightened GE risks and the global economic  headwinds, implying a targeted FY13E gross yield of 4.7%.

Rating  Maintain MARKET PERFORM

Although we have raised our TP, we maintain our rating for SunREIT as there is no clarity on any asset injection and they are facing challenges faced in the hospitality and office segments.

Risks    Retail sector risks. Sector derating if investors switch to higher beta developers.

Source: Kenanga