1Q17 realised net income (RNI) of RM66.7m met both market and our expectations at 24%. 1Q17 GDPU of 2.27 sen is also within expectations. We make no changes to FY17-18E numbers. Maintain OUTPERFORM with an unchanged TP of RM1.85, based on FY17-18E average GDPS of 10.6 sen (NDPS: 9.5 sen) and a +2.10 ppt spread to the 10-year MGS of 3.60%.

1Q17 realised net income (RNI) of RM66.7m came within expectations, making up 24% of consensus and our estimates. 1Q17 GDPU of 2.27 sen included a non-taxable portion of 0.44 sen and came in within our expectation at 22% of FY17E GDPU (5.8% yield).

Results highlight. YoY-Ytd, GRI was up by 6% driven by the retail segment (+14.5%) from Sunway Putra Mall, Sunway Pyramid, and Sunway Carnival. Meanwhile, the hospitality (-20.4%) and office segment (-10.8%) weighed down on top line growth due to the closure of Sunway Pyramid Hotel (previously known as Sunway Pyramid Hotel East) for refurbishment in 4Q16, and lower occupancy at Sunway Tower and Sunway Putra Tower. Although NPI margins were flattish, RNI margins improved (by +1.8ppt) as 1Q17 pretax income was inclusive of an unrealised fair value loss on interest rate swap amounting to RM2.6m vs. 1Q16 fair value gain on interest rate swap of RM3.9m, resulting in RNI increasing by 10%. QoQ, GRI was up by 4% mainly due to the retail (+3.3%) and hospitality segment (+16.0%), while the office segment declined by 1.6%. This coupled with stronger NPI margins (+1.58ppt) and after adding back the fair value loss on interest rate swap amounting to RM2.6m, increased RNI by 10%. (refer overleaf)

Outlook. Management is targeting to spend c.RM100m on capex in FY17 mainly for the refurbishment of Sunway Pyramid Hotel East (previously Sunway Pyramid Hotel East & Pyramid Tower Hotel), which we have 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. Note that we make no changes to our FY17-18E numbers.

Maintain OUTPERFORM and TP of RM1.85. 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.

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

Source: Kenanga Research - 28 Oct 2016