Period  1Q15

Actual vs. Expectations 1Q15 realised net income (RNI) of RM63.4m came in within expectations, making up 25.0% of consensus estimates and 26% of ours.

Dividends  1Q15 GDPU of 2.28 sen per unit (which includes a non-taxable portion of 0.32 sen). This is on track to meeting out FY15E as it makes up 26% of our fullyear GDPU estimates.

Key Results Highlights QoQ, GRI increased by 4% to RM113.8m. This was driven by the retail segment (+4.0%) from SP and SC on double digit reversions, and the hospitality segment (+9.6%) from SRHS on better ADR and occupancy, and SHSJ due to better occupancy post refurbishment. The office segment declined slightly (-0.3%) due to lower occupancy at ST. NPI margins improved by +3.8ppt as operating cost decreased due to the reversal of overprovision of assessment in 4Q14, allowing NPI to increase by 10% to RM86.5m. The quarter also saw lower expenditure (-1%) from lower Trust expenses, and higher nonoperating income (+16%) which pushed RNI up by 13% to RM63.4m.

 YoY, GRI grew by 14% mainly attributable to the retail segment (+15.6%) from rental reversions on all retail assets in FY14, mainly SP and SC, and hospitality segment grew (+18.9%) due to similar reasons mentioned above. However, the office segment declined (-2.3%) due to lower occupancy at ST. Operating cost increased (+18%) due to; (i) electricity tariff hike, (ii) advertising and promotion expense and (iii) one-off maintenance expense for SP, allowing NPI to increase by 12% to RM86.5m. All in all, the higher expenditure (+11%) and financing cost (+5%) was not sufficient to drag down RNI, which increased by 15% to RM63.4m

Outlook  Management expects to spend close to RM400m in FY15E mainly for the refurbishment of Sunway Putra Place and has spent up to RM38m in 1Q15.

 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 and FY16E earnings.

Rating Maintain MARKET TPERFORM

Valuation  We maintain our MP call as we have factored in potential re-rating catalyst (i.e. European QE and

SPP) and there are no further threats to our call at this juncture. No changes to out TP of RM1.56 based on FY15/16E target gross dividend yield of 6.1% (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 Bond yield expansion, earnings risks due to hospitality division

OTHER POINTS

Retail segment main contributor of strong GRI growth. The retail segment grew by a solid 15.6% YTD mainly due to Sunway Pyramid (SP) and Sunway Carnival (SC). SP’s revenue grew by 14.6% on the back of double digit rental reversions on 1,033,523sfI in FY14 which was the malls major rental reversion year (61% of NLA up for renewal), and also additional income from OB5 which opened in 2Q14. SC’s GRI increased by 23.8% in 1Q15 also on double-digit rental reversions as an estimated 51.2% of the malls’ NLA was up for renewal in FY14. Occupancy increase for SP to 98.0% (from 97.0% in 1Q14) post the completion of OB5, and SC’s occupancy improved to 99.5% (from 93.9%) as new tenant Sam’s Groceria has moved in. As a result of the strong rental reversions, the retail segment’s NPI grew by 11.6% in 1Q15.

Hospitality segment improved by 18.9% in 1Q15 on better occupancy and ADR. The hospitality segment is making a strong come-back after a lulled FY14 as GRI grew by 18.9% in 1Q15. This was mainly due to Sunway Resort Hotel & Spa (SRHS) from better ADR and improved occupancy rates 80.9% (from 72.4%) which was bolstered by corporate and MICE business. Sunway Hotel Seberang Jaya (SHSJ) revenue increased by 28.5% due to better average occupancy of 77.6% (from 57.8% in 1Q14) post refurbishment. Sunway Putra Hotel has yet to see improvements in GRI due to on-going major refurbishment works at SPP.

Office segment declined by 2.3% in 1Q15 due to Sunway Tower. The office segments GRI decline by 2.3% in 1Q15 solely due to Sunway Tower as tenants Ranhill Worley Parsons Sdn Bhd (anchor tenant) is progressively vacating out of Sunway Tower (ST). Management expects ST’s occupancy to drop to 77% when Ranhill surrenders 72,000sf by Dec 2014. We make no changes to our estimates as we have previously accounted for this and have taken a conservative stance by assuming 10% occupancy at Sunway Tower once Ranhill fully vacates the premises. Management is actively seeking for new tenants at ST to cushion the impact, but demand for office space remains challenging due to the supply glut situation.

Source: Kenanga