FY17 realised net income (RNI) of RM267.4m met market and our expectations at 99%. FY17 GDPU of 9.08 sen was also within expectations (99%). We make no changes to FY18E earnings and introduce FY19E. Maintain OUTPERFORM and TP of RM1.90 based on FY18E GDPS of 9.9 sen and a +1.30 ppt spread to the 10-year MGS target of 4.00%.

FY17 realised net income (RNI) of RM267.4m came in within expectations, making up 99% 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 in 2Q17. 4Q17 GDPU of 2.27 sen includes a non-taxable portion of 0.79 sen bringing FY17 GDPU to 9.19 sen. However, after stripping off 0.11 sen from the court award in 2Q17, FY17 GDPU is 9.08 sen, which is within our expectation at 99% of FY17E GDPU.

Results highlight. YoY-Ytd, GRI was up marginally (+3%) mainly from: (i) the retail segment (+5.8%) from Sunway Pyramid, Sunway Carnival and especially Sunway Putra Mall, and (ii) office segment (+4.0%) mainly contributed by Sunway Putra Tower, while the hotel segment was down (-11.4%) mostly due to the closure of Sunway Pyramid Hotel in 4Q16. This was on the back of stable NPI (74%) and RNI (51%) margins, increasing RNI by 4% (after stripping out a one-off item of RM3.2m from recognition of a court award for Sunway Putra in 2Q17). Note that we had also previously stripped off RM6.2m from RNI in 2Q16 related to another court award for the Sunway Putra litigation case. QoQ, GRI was down by 2% due to a slight decline in: (i) retail (- 4.5%) at Sunway Pyramid, Sunway Carnival and Sunway Putra Mall mainly as 3Q17 was a stronger quarter from higher turnover sales, and (ii) office segment (-1.3%), but this was negated by hospitality (+18.9%) as Sunway Pyramid Hotel East completed refurbishment in 4Q17. NPI margin remained flattish at 74%, resulting in a lower RNI by 4%.

Outlook. FY18E capex expenses will mostly be for Sunway Carnival Extension in 2H18. As such, we are expecting RM60-100m in FY18- 19E. In terms of leases up for expiry, FY18-19E has minimal leases up for expiry at 17.5-12.0% of NLA. We expect mid-to-single digit reversions for retail and low-to-mid single-digit reversions for office assets, while we expect flattish growth for the hospitality segment’s average room rates (ARR).

We make no changes to FY18E and introduce FY19E numbers. We expect FY18-19E of RM294-298m, which translates to FY18-19E GDPU of 10.0-10.1 sen (5.8-5.9% yield).

Maintain OUTPERFORM and TP of RM1.90 based on FY18E GDPS of 10.0 sen and target gross yield of 5.3% (net: 4.8%) on a +1.30ppt spread to the 10-year MGS target of 4.00%. Our applied spread is close to retail MREIT peers’ average yield of 5.4% due to the large portion of earnings driven by its stable retail component, while we have already priced in earnings fluctuations in the office and hotel segments. At current level, SUNREIT is commanding gross yields of 5.8% (on FY18E), which is slightly better than MREIT peers (>RM1b market cap) at 5.6%, warranting an OUTPERFORM 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 - 11 Aug 2017