Period  2Q14/ 1H14

Actual vs. Expectations 1H14 realised net income (RNI) of RM117.4m came in within expectations, making up 52% and 55% of street and our estimates, respectively.

Dividends  2Q14 GDPS of 2.23 sen per unit (which includes a non-taxable portion of 0.34 sen). This implies 1H14 GDPS of 4.2 sen which makes up 55% of our full-year estimates.

Key Results Highlights QoQ, GRI was strong, growing by 10% to RM110.3m on the back of (i) strong rental growth from Sunway Pyramid (SP) as the mall achieved 14.6% rental reversions on 87% of a 3-year term of renewed leases/new tenancies (61% of NLA), (ii) Sunway Carnival enjoying strong reversions from spaces up for renewals despite the 1.1ppt drop in occupancy rates to 92.8% (iii) higher revenue contribution for hospitality from Sunway Resort Hotel and Spa and Pyramid Tower Hotel from the aggressive promotional activities this quarter after a weak 1Q14, and (iv) Sunway Hotel Seberang Jaya’s revenue doubled post refurbishment. Thus, RNI increased in tandem with topline by 12% to RM62.0m, despite the increased expenditure (+6%) and operating cost (+12%).

 YoY, topline grew marginally by only 2% to RM210.5m. However, operating costs reduced significantly by 10% due to (i) closure of Sunway Putra Mall for refurbishment, (ii) lower utilities expense at Sunway Pyramid (SP) from completion of the chiller retrofit exercise, and (iii) lower building upkeep expense at SP, which boosted RNI growth by a substantial 9% to RM117.4m.

Outlook  Management expects to spend an additional RM155m on CAPEX for 2H14, and an RM280m in FY15E, mainly for the refurbishment of Sunway Putra Place.

 While the hotel segment has done well given aggressive promotional efforts, there could still be challenges as SPP is adversely affected by on-going refurbishment, coupled with the competitive hospitality environment.

 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 We make no changes to FY14E and FY15E GDPS forecasts of 7.6 sen and 7.9 sen, respectively, implying yields of 6.1% (net: 5.5%) and 6.3% (net: 5.6%) respectively.

Rating Upgrade to MARKET PERFORM (from UNDERPERFORM)

Valuation  We roll forward our earnings to FY15E as we have hit the half year mark for FY14E. Hence, we upgrade TP to

RM1.23 (from RM1.19) based on unchanged FY15E target gross dividend yield of 6.4% (net: 5.8%) or a +2.3ppt spread to the 10-yr MGS of 4.15%.

Risks to Our Call Downside risk to our calls lies with bond yield expansion, while downside risk to our earnings depends on further weaknesses from hospitality.

Source: Kenanga