Period     4Q13/FY13

Actual vs. Expectations   FY13 realised net income (RNI) of RM218.8m was within expectations, making up 102% and 104% of street and our expectations, respectively. The reported FY13E earnings of RM392.3m included RM173.5m in fair value gains, mainly from Sunway Pyramid.

Dividends    4Q13 GDPS of 2.02 sen (incl. non-taxable portion of 0.68 sen). FY13 GDPS amounted to 8.3 sen (6.2% yield) based on 100% payout or within expectations.  

Key Results Highlights  YoY, FY13 RNI grew 15%, attributable to new income contribution from Sunway Medical Centre (SMC), Sunway Pyramid and Sunway Carnival and positive rental reversions of 18.7% (mainly driven by Sunway Pyramid, Sunway Carnival and Sunway Putra Tower). Financing cost was lower by 21.7% to RM63.6m due to interest savings from a debt refinancing exercise and a one-off charge from an amortisation of loan transaction costs of RM6.0m in FY12 resulting in the average cost of debt decreasing from 4.45% in FY12 to 3.77% in FY13. 

QoQ, RNI was flat at RM55.5m on the back of a 2% decline in topline largely due to Sunway Putra Mall as it goes offline for AEIs. However, the impact was mitigated by a decrease in financing cost by 10.3% to RM15.7m. 

Outlook    SunREIT will pursue growth through AEI’s going forward (targeting RM500.0m on CAPEX in the next 2 year which is mainly for Sunway Putra Mall). The asset acquisition environment remains challenging as yield accretive assets are tough to come by, but management guided that there could be one potential asset acquisition by yearend.

Change to Forecasts   Lowering FY14E GDPU by 5% to 7.7 sen (5.8%) largely due to Sunway Tower (refer overleaf).

Rating  Maintain MARKET PERFORM

Inline with our sector call whilst our new TP provides a total return of 6%.

Valuation     Reduce TP to RM1.46 from RM1.56 on lowered FY14E DPU and unchanged gross yield target of 5.3% (net: 4.7%).

Risks   Earnings risks due to weak office and hospitality segment. Yield dilutive acquisitions and sector de-rating due to reversals in yield curves. More downside risk to our call if the 10-year MGS continues to rise beyond our FY14E 3.5%.

OTHER POINTS

Unexciting growth for FY14 DPU. Management has highlighted that they wish to maintain DPU at 8.3 sen in FY14, but it will be challenging to do so in light of the setback in earnings from Sunway Putra Mall (which contributed RM17.1m to NPI in FY12) and the possibility of dampened earnings from Sunway Putra Tower as it might not be able to secure Ranhill Worley Parsons as a tenant. Ranhill Worley Parsons would take up 84.0%  of gross rent. We will revisit this issue pending further updates from management.

Average occupancy rates are stable at 98.3% in FY13 from 98.6% in FY12. The slight drop is due to on-going works to reconfigure an existing area of 23,432sf in Oasis Boulevard 5 Project since April 2013. This is also taking into account the reduction in occupancy from Sunway Putra Mall which ceased operations in April 2013 for major refurbishments. Rental Reversion rates were positive with Sunway REIT securing 89.0% of the portfolios NLA that was up for expiry. Rental renewal rates for the portfolio decreased marginally to 89.0% in FY13 compared to 89.7% in FY12 as Sunway Pyramid and Sunway Carnival fell short on meeting its 100.0% renewal rates as in FY12. Sunway Pyramid only secured 94.0% renewals, which is part of their tenancy renewal attrition process to change the tenancy mix. Sunway Carnival only achieved 71.8% as management did not renew an anchor tenant as they are looking to secure more smaller tenants which tend to fetch higher rental rates compared to large anchor tenants. Note that 28.8% of leases expiring  in FY14. This excludes Sunway Putra Mall, which is  currently under refurbishment. Sunway Pyramid, Sunway Carnival, Menara Sunway and Sunway Putra Tower will see the bulk of its NLA expiring, of 52.5%, 55.6%, 62.5% and 71.4%, respectively. 

Moving forward with more AEI’s to strengthen organic growth.  The REIT has spent RM40.6m in 4Q13 alone and RM67.1m YTD on CAPEX which was used to fund car park linkages at Sunway Resort Hotel & Spa, refurbishment at Sunway Hotel Seberang Jaya and Sunway Putra Mall, and AIE’s at Menara Sunway and Sunway Pyramid. The REIT intends to spend another RM500.0m on CAPEX over the next 2 years. This will be used for the major refurbishment on Sunway Putra Mall, the basement linkages in Sunway Resort Hotel & Spa and creation of new NLA (20,362 sf) and reconfiguration of existing NLA (23,432 sf) at Oasis Boulevard 5, Sunway Pyramid.

Challenging outlook for asset acquisition. Management highlighted that they are maintaining their policy of acquiring one asset a year. So far there have been no asset acquisitions in CY13 and management hopes to secure one asset by year-end.  The asset acquisition environment, however, has been challenging as yield accretive assets are tough to come by. 

Lower financing cost. The groups debt profile did not change much and is currently 81:19 fixed:floating for FY13 as opposed to 20:80 fixed:floating in FY12, which reduces risk of higher interest rates in the future. Financing cost in FY13 reduced by 21.7% to RM63.6m as a result of interest savings due to active capital management initiatives and a one-off charge from an amortisation of loan transaction costs of RM6.0m in FY12 from a refinancing exercise. This resulted in the average cost of debt decreasing from 4.45% in FY12 to 3.77% in FY13. 

Lowering FY14E GDPU by 5.0% to 7.7 sen (5.8%). Post housekeeping, the major reason is to reflect risk to our earnings from Sunway Tower as it could potentially lose Ranhill Worley Parsons (84% of the asset’s gross rent)  as a tenant. This is insufficient to negate the lower financing rates as we expect the group to borrow to fund its heavy AEIs this year. However, if SUNREIT is able to retain the tenant or find a similar size replacement, we will upgrade our earnings accordingly.

Source: Kenanga