9M17 realised net income (RNI) of RM200.6m met market and our expectations at 74%. 9M17 GDPU of 6.81 sen was also within expectations. We make no changes to FY17- 18E earnings. Maintain MARKET PERFORM but increase TP to RM1.80 (from RM1.74), based on FY18E GDPS of 9.9 sen (from average FY17-18E GDPS of 9.6 sen) and a +1.30 ppt spread to the 10-year MGS target of 4.20%.

9M17 realised net income (RNI) of RM200.6m came in within expectations, making up 74% 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. 3Q17 GDPU of 2.37 sen includes a non-taxable portion of 0.47 sen bringing 9M17 GDPU to 6.92 sen. However, after stripping off 0.11 sen from the court award, 9M17 GDPU is 6.81 sen, which is within our expectation at 74% of FY17E GDPU (5.4% yield).

Results highlight. YoY-Ytd, GRI was up marginally (+2%) mainly from: (i) retail segment (+6.3%) from contributions on all assets, especially Sunway Putra Mall, and (ii) office segment (+3.2%) mainly contributed by Sunway Putra Tower, while the hotel segment was down (-21.0%) mostly due to the closure of Sunway Pyramid Hotel in 4Q16. This was on the back of stable NPI (74%) and RNI (51%) margins. All in, RNI was up by 3% after stripping out a one-off item of RM3.2m from recognition of a court award for Sunway Putra in 2Q17, while we had also previously stripped off RM6.2m from RNI in 2Q16 related to another court award for Sunway Putra litigation case. QoQ, GRI was up by 6% with positive contributions from all segments such as; (i) retail (+6.9%) mostly from Sunway Pyramid and Sunway Carnival on positive reversions, (ii) hospitality (+2.8%), and (iii) office (+3.3%). NPI margins remained flattish at 74%, but RNI was up by 9% post stripping out one-off court award of RM3.2m in 2Q17.

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 FY18 will only see 15.4% leases up for expiry. *Note that we make no changes to our FY17-18E earnings.

Maintain MARKET PERFORM but increase TP to RM1.80 (from RM1.74) based on FY18E GDPS of 9.9 sen (NDPS: 8.9 sen) (from average FY17-18Eof 9.6 sen) and target gross yield of 5.5% (net: 5.0%) on a +1.30ppt spread to the 10-year MGS target of 4.20%. Our spread is close to MREIT peers’ (>RM1b market cap) average yields of 5.5%, and slightly higher than retail MREIT peers’ average yield of 5.2% due to earnings fluctuations in SUNREIT’s office and hotel segments. At current level, SUNREIT is commanding gross yields of 5.8% (based on FY18E), which is in line with MREITs’ peers (>RM1b market cap) at 5.8%, warranting a MARKET PERFORM call.

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 - 4 May 2017