FY16 realised net income (RNI) of RM256.3m met both market and our expectations at 98% and 101%, respectively. FY16 GDPU of 9.18 sen was also within expectations (99%). Maintain OUTPERFORM call with an unchanged TP of RM1.85, based on FY17-18E average target gross yield of 5.70% (net: 5.10%). Target gross yield is derived from an unchanged +2.1 ppt spread to the 10-year MGS of 3.60% on average FY17-18E GDPS of 10.6 sen (NDPS: 9.5 sen).

FY16 realised net income (RNI) of RM256.3m came in within expectations, making up 98% and 101% 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 from a litigation case on Sunway Putra. 4Q16 GDPU of 2.12 sen included a non-taxable portion of 0.81 sen. FY16 GDPU of 9.18 sen (5.5% yield) came in within our expectations (99% of FY16E GDPU). Note that the dividend included a one-off dividend from the court award as mentioned above of 0.21 sen. After stripping off 0.21 sen, FY16 GDPU of 8.97 sen was still within expectation at 97%.

Results highlight. YoY-Ytd, GRI was up by 12% driven by the: (i) retail segment (+15.1%) from Sunway Pyramid Sunway Carnival and Sunway Putra Mall, and (ii) hospitality segment (+18.7%) from Sunway Resort Hotel & Spa, and Sunway Putra Hotel. Meanwhile, the office segment continued to weigh down top line growth (-22.6%) from all assets except Wisma Sunway (refer overleaf). NPI margins declined (-1.43ppt) slightly on higher operating cost, while RNI only increased by 6% on the back of higher expenditure (+14%) and higher financing cost (+22%) for capex funding and cessation of interest capitalisation on SPM. QoQ, GRI was down by 5% mainly due to: (i) the retail segment (-5.1%) as higher turnover rent was recognised in 3Q16 for Sunway Pyramid and Sunway Carnival, and (ii) hospitality segment (-13.6%) due to the closure of Sunway Pyramid Hotel East in end March-16, while the office segment improved (+9.7%) from improvements on most assets. This coupled with weaker NPI margins (-1.21ppt) as cost did not decrease in tandem with top line, dragging down bottom line by 10%.

Outlook. Management is targeting to spend c.RM100m on capex in FY17 mainly for the refurbishment of Sunway Pyramid Hotel East (previously Pyramid Tower Hotel), which we have previously accounted for in our estimates. In terms of leases up for expiry, FY17 has 22.0% of NLA up for expiry and it is a major rental reversion year for Sunway Pyramid (54%) and Sunway Carnival (72.0%) of which we expect mid to high single digit reversions, while FY18E will only see 12.8% leases up for expiry.

Reiterate OUTPERFORM call with unchanged TP of RM1.85. We maintain our FY17E numbers and introduce FY18E earnings. We maintain our call and TP of RM1.85, based on FY17-18E average target gross yield of 5.70% (net: 5.10%), on an unchanged +2.1 ppt spread to the 10-year MGS of 3.60% on average FY17-18E GDPS of 10.6 sen (NDPS: 9.5 sen). We maintain our OUTPERFORM call for its income contribution from SPP and visible acquisition pipeline, thanks to its parent, SUNWAY. SUNREIT is commanding potential 16.0% total returns at current levels.

Risks to our call include: (i) bond yield expansion, (ii) earnings risks in hospitality and office division, and (iii) lower-than-expected contribution from SPP.

Source: Kenanga Research - 12 Aug 2016