Period  4Q14/FY14

Actual vs. Expectations FY14 realised net income (RNI) of RM231.9m came in within expectations, making up 101% of consensus estimates and 103% of ours. The reported FY14 earnings of RM411.1m included RM179.1m fair value gains.

Dividends  4Q14 GDPU of 2.03 sen per unit (which includes a non-taxable portion of 0.45 sen). This implies FY14 GDPU of 8.36 sen (5.9% yield) which made up 103% of our full-year GDPU estimates.

Key Results Highlights QoQ, GRI increased by only 1% to RM109.2m. The retail (+0.6%) and office (+0.7%) segment showed flattish growth while the hospitality segment grew by 3.7% supported by recovery of corporate and MICE business at SRHS and PTH, and better ARR (average room rates) for refurbished rooms at SPH. However, operating cost increased by a significant 11% to RM30.4m from higher electricity tariffs and maintenance cost which dragged down NPI by 2% to RM78.8m. The quarter also saw increased expenditure (+9%) from higher manager’s fees which dragged down RNI by 4% to RM56.1m.

 YoY, GRI grew by 3% to RM427.8m. The main drivers were the retail segment which grew 1.5% due to double-digit rental reversions at SP and SC, and the Office segment which grew by 4.5% from Menara Sunway upon completed AEI’s. While SPH benefited from better ARRs, the overall hotel segment remained weak, declining by 6.3% due to the loss of income arising from Sunway Putra Mall’s closure. NPI increased by 4% to RM321.0m due to; (i) lower utilities expenses from SP on energy savings upon completion of the chiller retrofit exercise and (ii) closure of Sunway Putra Mall. RNI margins improved to 54.2% from 52.6% on the back of lower finance cost (-1%). However, GDPU was flattish (+1%) as share base has grown by 5% YoY.

Outlook  Management expects to spend close to RM400m 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 make no changes to our FY15E earnings.

Rating Maintain OUTPERFORM

Valuation  Our call is sector driven. We maintain OUTPERFORM on SUNREIT as we expect the European QE to be a positive re-rating catalyst for MREITs, while most of the near-term earnings risk have been put to rest. Maintain TP at RM1.56 based on unchanged FY15E/FY16E target gross dividend yield of 6.2% (net: 5.5%) or a +2.3ppt spread to the 10-year MGS of 3.80% on FY15/16E DPS of 9.5 sen.

Risks to Our Call (i) Bond yield expansion, earnings risks due to hospitality division

OTHER POINTS

Sunway Pyramid (SP) and Sunway Carnival (SC) enjoys positive double digit rental reversions in FY14 for major leases up for expiry. Sunway Pyramid’s double-digit rental reversions on 1,033,523sf (99%) of the 3-year term of renewed leases/new tenancies in FY14 alone contributed 60.4% to FY14’s GRI. FY14E was a major rental reversion year for Sunway Pyramid given the expiry of 61% of Sunway Pyramid’s total NLA. SC’s GRI increased by 12.5% YTD also on double-digit rental reversions as an estimated 51.2% of the malls’ NLA was up for renewal in FY14. Occupancy declined slightly for SP to 98.3% YTD (from 97.8% in FY13) due to the reconfiguration work at OB5 which was completed in Dec-13, while Sunway Carnival’s occupancy declined to 92.0% YTD (from 97.4% in FY13) as a previous mini-anchor did not renew its lease. Management has highlighted that occupancy will be at 99% in 1Q14 as they have already signed in a new mini-anchor. As a result of the strong rental reversions, the retail segment’s NPI grew by 11.4% in FY14.

Office Segment GRI grew by 4.5% YTD from better rental at Menara Sunway (MS) and Sunway Putra Tower (SPT). Despite the current weak environment for office spaces due to the supply glut, SUNREIT’s office segment recorded a 4.5% growth YTD due to: (i) better rental rates for MS post the completion of AEI’s in 2Q13, (ii) the alignment of SPT’s rental rates to market rates in 4Q14, and (iii) Sunway Tower on slightly better YTD occupancy rates of 84.3% (from 83.0% in FY13). However, the segment’s NPI decline by 1.4% YTD due to Sunway Tower as it incurred higher utilities from: (i) the electricity tariff hike, (ii) provision for increased assessment, and (iii) higher building upkeep expenses. Going forward, management highlighted that Sunway Tower will see a slight drop in occupancy (to 77%) in the short-term as Ranhill will be surrendering 72,000sf of space, reducing its occupied NLA to 69.0% (from 79.6%). We do not expect this to have a material impact on earnings as Sunway Tower only makes up 3.2% of NPI. The office segment’s occupancy was constant YOY, safe for SPT which saw occupancy declining to 74.2% (from 78.0% in FY13) due to non-renewal of a tenant since Sept-13 as there is on-going refurbishment at SPP.

Hospitality segment dragged down by Sunway Putra Hotel (SPH) and Pyramid Tower Hotel (PTH). The hospitality segment’s NPI declined by 7.4% YTD due to weakness from: (i) SPH which seen a drop in occupancy to 42.6% (from 60.2%) due to on-going refurbishment work at SPP, and (ii) PTH which saw a decline in GRI despite improving occupancy as it is not supported by the F&B and banquet operations being a “rooms only” hotel. On the flip side, other hospitality assets, Sunway Resort Hotel and Spa (SRHS) and Sunway Hotel Seberang Jaya (SHSJ) saw YTD NPI increase as: (i) SRHS’ occupancy increased to 78.8% (from 71.3% in FY13) and supported by the recovery of MICE (Meetings, Incentives, Corporates and Exhibition) activities, while (ii) SHSJ saw improved revenue as occupancy increased to 67.8% (from 51.6%) post completion of major refurbishment in 4Q13.

CAPEX in FY15 to focus on Sunway Putra Mall. Management has guided that they have spent an estimated RM157m on CAPEX year-to-date mainly on Sunway Putra Mall, Sunway Putra Hotel and the car park linkages at Sunway Resort Hotel and Spa. Management plans to spend close to RM400.0m CAPEX in FY15, to be utilised mostly on Sunway Putra Place. The entire accelerated refurbishment plan will cost RM460m, with completion targeted by 1QCY15.

Source: Kenanga