1Q18 realised net income (RNI) of RM78.7m met market and our expectations at 28% and 27%, respectively. 1Q18 GDPU of 2.67 sen was also within expectation (27%). We make no changes to FY18-19E of RM294-298m. Maintain OUTPERFORM and TP of RM1.87 based on FY18E GDPS of 10.0 sen and a +1.40 ppt spread to the 10-year MGS target of 4.00%.

1Q18 realised net income (RNI) of RM78.7m came in within expectations, making up 28% and 27% of consensus and our estimates, respectively. 1Q18 GDPU of 2.67 sen includes a non-taxable portion of 0.33 sen) which is also within our expectation at 27% of FY18E GDPU.

Results highlight. YoY-Ytd, GRI was up by 10% driven by all segments; (i) retail (+3.9%) on all assets from stable occupancy and positive reversions, save for SunCity Ipoh Hypermarket, (ii) hotel segment (+40.9%) driven by Sunway Pyramid Hotel post the completion of the refurbishment in June-17, Sunway Putra Hotel benefiting from the SEA and PARA games and Sunway Hotel Georgetown on stronger leisure segment, (iii) office segment with positive growth from all assets save for Wisma Sunway on a slight tenant downsizing, but occupancy is expected to improve gradually to 99% by 4Q18, and (iv) others segment (+20.8%) from the completion of the acquisition of the Industrial asset in Shah Alam in Aug 2017. NPI margins improved by 4.0ppt on lower maintenance expenses at Sunway Pyramid. All in, RNI was up by 18% on slightly lower expenditure (-17%) and despite higher financing cost (+11%) from Shah Alam Industrial asset. QoQ, GRI was up (+7%) driven mostly by: (i) retail segment (+2.7%), and (ii) hotel segment (+27.7%) on similar reasons mentioned above, (iii) other segment on inclusion of the Shah Alam Industrial asset, while (iv) the office segment was flattish. NPI margins also improved +4.3ppt due to similar reasons mentioned above, allowing RNI to increase by 18%.

Outlook. FY18E capex expenses will mostly be for Sunway Carnival Extension in 2H18. As such, we are expecting RM60-100m in FY18- 19E. 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).

Maintain FY18-19E of RM294-298m, which translates to FY18-19E NDPU of 9.0-9.1 sen (5.2-5.3% net yield).

Maintain OUTPERFORM and TP of RM1.87 based on FY18E GDPS/NDPS of 10.0/9.0 sen and target gross yield of 5.4% (net: 4.9%) on a +1.40ppt 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 5.7% and retail MREITs of 5.4%, 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 - 01 Nov 2017