2Q16/1H16
1H16 realised net income (RNI) of RM128.0m came in within expectations, making up 47% and 46% of consensus and our estimates, respectively.
We have stripped off RM6.2m from RNI as it is a non-recurring income from a court award for loss of income for Sunway Putra litigation case.
2Q16 GDPU of 2.57 sen (2.36 sen after stripping off 0.21 sen from court award) includes a non-taxable portion of 0.45 sen.
1H16 GDPU of 4.69 sen came in within our expectations (46% of FY16E GDPU). However, after stripping off 0.21 sen, 1H16 GDPU of 4.48 sen came in slightly below our expectation (44% of FY16E GDPU) as we had forecasted lesser managers units to be issued.
QoQ, GRI was up by 9% driven by the retail segment (+11.9%) mainly from: (i) Sunway Putra Mall (SPM) which opened in May- 15, (ii) Sunway Pyramid and Sunway Carnival on positive reversions, as well as the hospitality segment (+5.5%) on all assets, save for PTE. The office segment was a drag (-10.2%) mainly from Sunway Tower. Lower expenditure (-2%) helped RNI increase by 11%. This is after stripping out the one-off gain of RM6.2m from the court award.
YoY-Ytd, GRI was up by 11% on better performance from the retail segment (+13.5%) on similar reasons mentioned above, and hospitality segment (+23.0%) on all assets except PTE. Meanwhile, the office segment weighed down topline growth (- 24.2%) due to Sunway Tower and Menara Sunway’s lower occupancy (refer to overleaf). NPI margins declined by 2.1ppt due to additional operating expenses incurred for SPM. Additionally, higher expenditure (+15%) and financing cost (+30%) for CAPEX and funding of Sunway Hotel Georgetown and Wisma Sunway acquisitions in 3QFY15, dragged RNI margins lower by 4.9ppt. All in, RNI increased marginally by 1%.
FY16 AEI is estimated at RM50m which will be mainly spent on Pyramid Tower East (previously Pyramid Tower Hotel) in 4Q16. To date, management has spent RM10m.
FY17 has 21.5% of NLA up for expiry and it is a major rental reversion year for Sunway Pyramid (56.9%) and Sunway Carnival (50.9%).
While our 1H15 bottomline is within expectation, we opt to lower our FY16E-17E earnings by 9%-10% in view of weaker office and hospitality segment going forward. (refer to overleaf)
We are estimating gross yields of 6.3-6.9% (net: 5.6-6.2%)
Maintain OUTPERFORM
We roll forward SUNREIT’s valuation to average FY16/17E (from FY16E). Post earnings adjustment, we maintain OP and lowered SUNREIT TP to RM1.60 (from RM1.73) based on FY16/17E target gross yield of 6.6% (net: 5.9%), on a higher +2.1ppt spread to the 10-year MGS of 4.00% on FY16/17E GDPS of 9.7 sen (NDPS: 8.8 sen). (refer to overleaf)
Note that we have highlighted the potential earnings weakness in our recent report titled Unwarranted Sell-downs dated 22-Jan-16. Even with the downgrade in earnings based on conservative estimates, SUNREIT still commands 13.9% total returns at current levels. Additionally, we maintain OUTPERFORM call for its contribution from SPP and visible acquisition pipeline.
Bond yield expansion, earnings risks in hospitality and office division, lower-than-expected contribution from SPP.
Source: Kenanga Research - 28 Jan 2016
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