Period

4Q15/FY15

Actual vs. Expectations

FY15 realised net income (RNI) of RM242.0m came in within expectations, making up 98% of consensus and our estimates. The reported FY15 earnings of RM541.4m included RM306.8m fair value gain, and RM5.9m one-off provisions for deferred tax on gain on freehold land.

Dividends

4Q15 GDPU of 2.05 sen per unit (which includes a nontaxable portion of 1.09 sen). FY15 GDPU of 8.73 sen (5.7% yield) made up 98% of our FY15E GDPU.

Key Results Highlights

QoQ, GRI was up by 4% on a stronger retail (+0.4%) and hotel (+19.6%) segment, namely; (i) Sunway Carnival, (ii) SRHS, (iii) Pyramid Tower Hotel, (iv) Sunway Putra Mall, (v) Sunway Putra Hotel (vi) Sunway Hotel Georgetown, and (vii) Wisma Sunway. This was on the back of a slight decline in the Office segment (-3.3%) mainly from; (i) SPT and (ii) Menara Sunway. NPI margins declined by 1.7ppt to 73.4% on higher electricity tariff and building maintenance, while higher financing cost (+14%) from a loan drawn down for CAPEX pulled down RNI by 4% to RM56.7m.

YoY-Ytd, GRI was up by 6% to RM453.5m on better performance from the retail segment (+10.6%) mainly from positive rental reversions at SP, SC and the opening of SPM in May-15. However, both the hospitality (-5.1%) and office (-9.3%) segment were weaker (refer overleaf). Additionally, higher expenditure (+17%) and financing cost (+12%) due to similar reasons mentioned above, stifled RNI growth, which only increased 4%.

Outlook

Management expects to spend up to RM50m in FY16E mainly for the refurbishment of Sunway Putra Hotel and Pyramid Tower East (previously Pyramid Tower Hotel).

Sunway Putra Mall opened in May and has a committed occupancy of up to 82.0% and will be opening in phases by end 2015.

The asset acquisition environment appears to be improving but SUNREIT’s 6.5%-7.0% property yield requirements is still relatively higher than asking rates.

Change to Forecasts

We trim our FY16E earnings by 2.8% to RM278m. (refer overleaf)

Rating

Maintain OUTPERFORM

Valuation

Maintain OP and TP at RM1.76 based on a target gross yield spread of +1.9ppt to our 10-yr MGS of 3.90%. This translate to a target gross yield of 5.8% (net: 5.2%) on FY16E GDPS of 10.2 sen (NDPS: 9.2 sen).

We maintain our OP due to the strong GDPU growth in FY16E mainly due to the superior earnings growth of 15% prospects vs. other sizeable retail MREITs (8.8%-7.3%) under our coverage due to the opening of newly refurbished assets at Sunway Putra. SUNREIT is commanding potential 20.5% total returns at current levels.

Risks to Our Call

(i) Bond yield expansion, (ii) weaker than expected rental reversions, (iii) weak occupancy rates, (iv) decline in demand in hospitality segment

Source: Kenanga Research - 12 Aug 2015