Period  1Q14

Actual vs. Expectations  1Q14 realised net income (RNI) of RM55.4m is within expectations, making up 24% and 26% of street and our estimates, respectively.

Dividends  1Q14 GDPS of 2.00 sen per unit (which includes a non-taxable portion of 0.35 sen) was flat, QoQ.

Key Results Highlights QoQ, gross rental income (GRI) decreased by 4% to RM100.2m due to softer portfolio rental reversions of 14.2% vs. 18.7% in 4Q13; from Sunway Pyramid, Sunway Carnival and Sunway Putra Tower (*refer overleaf). However, realised net income was flattish at RM55.3m because the negative topline impact was mitigated by better cost saving efforts in operating cost (9%) to RM23.1m, and financing cost (1%) to RM15.5m and a decrease in expenditure (14%) to RM6.7m.

 YoY, RNI increased by 6% to RM55.3m despite GRI being flat at RM100.2m due to significant decrease in operating cost by 14% to RM23.1m. This was attributable to lower utilities expense from the completion of the chillers retrofit exercise and lower building upkeep expenses of RM4.3m at Sunway Pyramid, and reduction in expenses from the closure of Sunway Putra Mall in May. As a result, NPI increased by 6% to RM77.1m.

Outlook  Total medium-term CAPEX is guided to be RM500m for 2 years (mainly through Sunway Putra Mall), with RM220m to be spent in FY14 and RM280m in FY15.

 Bearish on hotel segment due to lower contributions from corporate clients, who are typically the main contributors to hotel earnings (i.e. seminars and corporate events).

 Challenging asset acquisition environment due to the low cap rates of 5%-6% currently, while management is only targeting assets that deliver 6.5%-7.0% yields.

Change to Forecasts

 No changes to FY14E and FY15E GDPS forecasts of 7.7sen and 8.1sen, implying yields of 5.7% (net: 5.1%) and 5.9% (net: 5.3%) respectively. (Refer overleaf for details).

Rating Upgrade to MARKET PERFORM (from UNDERPERFORM)

 The stock has corrected by 12.3% YTD as MREITs has lost its shine given bond yield reversals and lack of asset acquisitions this year. We have factored in sufficient downside risks to their earnings. Current FY14E gross yield of 5.7% (net: 5.1%) is decent, which should limit further downside risks. As a result, we have upgraded our call based on unchanged TP of RM1.36, which provides a total return of 5.1% net of tax.

Valuation  Maintain TP of RM1.36 based on FY14E target gross dividend yield of 5.7% (net: 5.1%).

Risks to Our Call  Upside risk to our calls lies with bond yield compressions and yield dilutive acquisitions, while the downside risk to our earnings depends on further weaknesses from hospitality.

Source: Kenanga