Period

3Q16/9M16

Actual vs. Expectations

9M16 realised net income (RNI) of RM195.7m came in within expectations, making up 75% and 77% of consensus and our estimates, respectively.

Recall that we have stripped off RM6.2m from RNI in 2Q16 as it is a non-recurring income from a court award for loss of income for a litigation case on Sunway Putra.

Dividends

3Q16 GDPU of 2.37 sen includes a non-taxable portion of 0.56 sen. 9M16 GDPU of 7.06 sen came in within our expectations (76% of FY16E GDPU). Note that the dividend includes the one-off dividend from the court award as mentioned above of 0.21 sen.

Key Results Highlights

QoQ, GRI was lower marginally by 1%, mainly from lower revenue from hospitality segment (-28.3%) as Sunway Pyramid Hotel East was closed progressively during the quarter and fully closed by end 3Q16, and softer office segment (-10.2%). However, the downside impact was offset by improvement in retail segment (+4.4%), mainly from Sunway Pyramid and Sunway Carnival. Meanwhile, RNI was flattish due to lower operating cost (-3%) from lower quit rent, assessment and insurance expense.

YoY-Ytd, GRI was up by 13% driven by the: (i) retail segment (+19.8%) from Sunway Pyramid and Sunway Carnival, and (ii) hospitality segment (+34.9%) from Sunway Resort Hotel & Spa, Sunway Putra Hotel and Sunway Hotel Georgetown (refer overleaf). Meanwhile, the office segment weighed down topline growth (-18.9%) from all assets except Wisma Sunway. NPI margin declined by 1.7ppt mainly due to additional operating expenses incurred for SPM. Additionally, higher expenditure (+17%) and financing cost (+28%) for capex funding and cessation of interest capitalisation on SPM dragged RNI margins lower by 3.8ppt. All in, RNI increased by 6%.

Outlook

To date, management has spent RM54m on FY16 AEI, which is higher than our initial estimate of RM50m. Management expects to spent RM123m on Sunway Pyramid Hotel East (previously Pyramid Tower Hotel) AEI from 4Q16 onwards, for a period of 10 months. Hence, we estimate FY16 AEI at RM70m.

FY17 has 22.0% of NLA up for expiry and it is a major rental reversion year for Sunway Pyramid (56.7%) and Sunway Carnival (58.0%).

Change to Forecasts

Unchanged. We are estimating gross yields of 5.8-6.4% (net: 5.2-5.8%)

Rating

Maintain OUTPERFORM

Valuation

We fully roll forward SUNREIT’s valuation to FY17E (from average FY16/17E). We maintain OP and increased SUNREIT TP to RM1.74 (from RM1.60) based on FY17E target gross yield of 6.9% (net: 6.2%), on unchanged +2.1ppt spread to the 10-year MGS of 3.80% on FY17E GDPS of 10.2 sen (NDPS: 9.2 sen).

We maintain OUTPERFORM call for its income contribution from SPP and visible acquisition pipeline. SUNREIT is commanding potential 14.5% total returns at current levels.

Risks to Our Call

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

Source: Kenanga Research - 28 Apr 2016