Period

1Q16/3M16

Actual vs. Expectations

1Q16 realised net income (RNI) of RM60.6m came in within expectations, making up 22% of both consensus’ and our estimates.

Dividends

1Q16 GDPU of 2.12 sen per unit (which includes a nontaxable portion of 0.45 sen). This is on track to meeting our expectation as it makes up 21% of our FY16E GDPU.

Key Results Highlights

QoQ, GRI was up by 5% to RM121.2m driven by the retail segment (+2.2%) mainly from: (i) Sunway Putra Mall which opened in May-15, and (ii) Sunway Pyramid on positive reversions, as well as the hospitality segment (+43.3%), on all asset, primarily SRHS. The office segment was a drag (- 16.9%) mainly from Sunway Tower and Sunway Putra Tower. NPI margins improved slightly by 0.8ppt to 74.2% as cost did not increase in tandem with topline growth, which pushed RNI up by 7% to RM60.6m

YoY-Ytd, GRI was up by 7% to RM121.2m on better performance from the retail segment (+7.3%) on similar reasons mentioned above, and hospitality segment (+21.4%) on all assets except SHSJ. Similarly, the office segment weighed down topline growth (-22.0%) due to Sunway Tower and Sunway Putra Tower (refer overleaf). NPI margins decline by 1.8ppt to 74.2% due to additional operating expenses incurred for Sunway Putra Mall. Additionally, higher expenditure (+19%), and higher financing cost (+31%) for CAPEX and funding of Sunway Georgetown Hotel and Wisma Sunway acquisitions in 3QFY15, pulled down RNI margins by 5.8ppt to 50.0%. As a result, RNI declined by 5% to RM60.6m.

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), and has currently spent RM21m.

Sunway Putra Mall opened in May and has a committed occupancy of up to 83.9% and will be opening in phases by end 2015.

Change to Forecasts

We make no changes to our FY16-17E earnings. We are estimating gross yields of 6.9-7.6% (net: 6.2-6.8%)

Rating

Maintain OUTPERFORM

Valuation

Maintain OP and TP of RM1.73 based on a target gross yield spread of +1.9ppt to our 10-year MGS of 4.00%. This results in a target gross yield of 5.9% (net: 5.3%) on FY16E GDPS of 10.2 sen (NDPS: 9.2 sen).

We maintain OUTPERFORM due to the strong GDPU growth in FY16E mainly on the superior earnings growth prospect of 15% vs. other sizeable retail MREITs (9.3- 5.8%) under our coverage due to the opening of newly refurbished assets at Sunway Putra. SUNREIT is commanding potential 22.6% total returns at current levels.

Risks to Our Call

Bond yield expansion, earnings risks in hospitality and office division.

Source: Kenanga Research - 30 Oct 2015