1H17 realised net income (RNI) of RM130.7m met market and our expectations at 48%. 1H17 GDPU of 4.55 sen was also within expectations. We make no changes to FY17- 18E. Maintain MARKET PERFORM but increase TP to RM1.74 (from RM1.68), based on FY17-18E average GDPS of 9.6 sen (NDPS: 8.6 sen) and a lower +1.30 ppt spread to the 10-year MGS yield of 4.20%.

1H17 realised net income (RNI) of RM130.7m came in within expectations, making up 48% of consensus and our estimates. Note that we have stripped off RM3.2m from RNI as it is a non-recurring income from a court award for Sunway Putra. 2Q17 GDPU of 2.28 sen (2.17 sen after stripping off 0.11 sen from court award) includes a non-taxable portion of 0.61 sen bringing 1H17 GDPU to 4.55 sen. However, after stripping off 0.11 sen from the court award, 1H17 GDPU was 4.44 sen, which was also within our expectation at 48% of FY17E GDPU (5.2% yield).

Results highlight. YoY-Ytd, GRI was up marginally (+1%) mainly from growth in the retail segment (+7.6%) from Sunway Putra Mall, Sunway Pyramid, and Sunway Carnival, but top-line growth was dragged down by the hotel segment (-26.4%) due to the closure of Sunway Pyramid Hotel in 4Q16, and office segment (-3.3%) due to Sunway Tower and Menara Sunway?s lower occupancy, while NPI margins improved slightly (+0.45ppt) from better cost management at Sunway Pyramid. All in, RNI was up by 2% after stripping out a one- off item of RM3.2m from recognition of a court award for Sunway Putra in 2Q17, while we have also previously stripped off RM6.2m from RNI in 2Q16 related to another court award for Sunway Putra litigation case. QoQ, GRI was down by 2% mainly due to: (i) hotel segment (-9.7%) for lower occupancy at Sunway Resort Hotel and Spa (SRHS), and (ii) retail segment (-0.9%) mostly due to a reversal of billings at Sunway Carnival (SC), while the office segment saw slight improvements (+6.1%) mostly from Sunway Putra Tower. This coupled with higher financing cost (+1%) caused RNI to decline by 4% (after stripping out one-off court award of RM3.2m).

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 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 15.4% leases up for expiry. Note that we make no changes to our FY17-18E.

Maintain MARKET PERFORM but increase TP to RM1.74 (from RM1.68) based on FY17-18E target gross yield of 5.5% (net: 5.0%) and a lower spread of +1.30ppt (from +1.50ppt) to the 10-year MGS target of 4.20% and FY17-18E average GDPS of 9.6 sen (NDPS: 8.6 sen). SUNREIT?s spread to the 10-year MGS has been narrowing rapidly over the past 2-years vs. most retail MREIT peers (>RM1b market cap), likely driven by its strong retail component (78% of portfolio GRI). As such, we adjust our spread to be closer in line with retail MREIT peers? (>RM1b market cap) average yields of 5.4%, but the marginally higher applied yield target vs. retail MREITs? average yield is due to earnings fluctuations in SUNREIT?s office and hotel segment. Additionally, SUNREIT is commanding gross yields of 5.4% at current levels, in line with MREITs peers (>RM1b market cap) at 5.5%, warranting a MARKET PERFORM call.

Source: Kenanga Research - 15 Feb 2017