Period

2Q16/1H16

Actual vs. Expectations

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.

Dividends

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.

Key Results Highlights

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%.

Outlook

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%).

Change to Forecasts

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%)

Rating

Maintain OUTPERFORM

Valuation

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.

Risks to Our Call

Bond yield expansion, earnings risks in hospitality and office division, lower-than-expected contribution from SPP.

Source: Kenanga Research - 28 Jan 2016