Period  3Q14/ 9M14

Actual vs. Expectations 9M14 realised net income (RNI) of RM175.8m came in within consensus expectations at 78% but above ours at 84%. Our topline came in within expectations but due to our aggressive cost assumption, 9M14 results came in above our expectations.

Dividends  3Q14 GDPS of 2.1 sen per unit (which includes a non-taxable portion of 0.39 sen). This implies 9M14 GDPS of 6.3 sen which made up 83% of our full-year estimates due to similar reason mentioned above.

Key Results Highlights QoQ, GRI and RNI declined by 2% and 6% respectively. The retail segment (excluding Sunway Putra Place) grew by 4%, driven by Sunway Pyramid (SP) and Carnival double-digit positive reversions. However, the hospitality segment was the main drag due to lower occupancy rates in 3Q14, coming off the higher base arising from festive season in 2Q14, and Sunway Putra Hotel as it has been affected by the mall’s refurbishment. The office segment declined by 2% due to lower occupancy at ST. Additionally operating cost went up by 6% QoQ due to SPP provision of assessment rates.

 YoY, GRI grew by 2% to RM381.6m. Although the retail and hospitality showed improvements of 3%-10% in topline, the drag on results was the loss of income arising from Sunway Putra Mall closure. NPI increased by 5% to RM242.2m on the back of cost savings (6%) due to; (i) lower utilities expenses from SP from energy savings upon completion of the chiller retrofit exercise and (ii) closure of Sunway Putra Mall. RNI margins improved to 55.2% from 52.3% on the back of lower finance cost (-1%), and despite a slight increase in expenditure (2%) arising from higher management fees, which was not sufficient to compress margins.

Outlook  Management expects to spend RM135m on CAPEX for 4Q14, and an RM280m in FY15E, mainly for the refurbishment of Sunway Putra Place.

 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 have increased FY14E and FY15E earnings forecast by 6% and 13% to RM225m and RM246m, respectively after lowering our cost assumptions (refer to overleaf).

Rating Upgrade to OUTPERFORM (from MARKETPERFORM)

Valuation  Upgrade our TP to RM1.55 (from RM1.39) based on unchanged FY15E/ FY16E target gross dividend yield of 6.2% (net: 5.5%) or a +2.0ppt spread to the 10-year MGS of 4.15% on higher FY15/16E DPS of 9.5 sen.

Risks to Our Call Bond yield expansion, earnings risks due to hospitality division.

Source: Kenanga