1H18 realised net income (RNI) of RM148.8m met consensus and our expectations at 53% and 51%, respectively. 1H18 GDPU of 5.05 sen is also within expectations (51%). We make no changes to FY18-19E earnings of RM294-298m. Maintain OUTPERFORM but increase TP to RM1.90 (from RM1.87) post rolling forward to FY19E GDPS of 10.1 sen on a +1.40 ppt spread to the 10-year MGS target of 4.00%.

1H18 realised net income (RNI) of RM148.8m came in within expectations, making up 53% and 51% of consensus and our estimates, respectively. 2Q18 GDPU of 2.38 sen includes a non-taxable portion of 0.38 sen, bringing 1H18 GDPU to 5.05, sen which is also within our expectation at 51% of FY18E GDPU of 10.0 sen.

Results highlight. YoY-Ytd, GRI was up by 11% driven by all segments; (i) retail (+4.4%) on all assets from stable occupancy and positive reversions, save for SunCity Ipoh Hypermarket, (ii) hotel segment (+47.2%) mostly from Sunway Pyramid Hotel post the completion of the refurbishment in June 2017, and Sunway Putra Hotel from higher occupancy and average room rates (ARR), and contributions from the SEA and PARA games in 1Q18, (iii) office segment (4.1%), save for Wisma Sunway on a slight tenant downsizing and marginal decline at Sunway Tower, and (iv) others segment (+25.1%) from the completion of the acquisition of the industrial asset in Shah Alam in Aug 2017. NPI margins improved slightly by 1.5ppt on lower maintenance cost at Sunway Pyramid, allowing RNI to increase by 14%. This is after stripping off the RM3.2m court award for Sunway Putra in 2Q17 as it is non-recurring. QoQ, RNI was down by 11% on the back of a flattish GRI, higher operating cost (+26%) from increased maintenance cost at Sunway Pyramid and Sunway Carnival, and allowance for doubtful debts, and higher financing cost (+4%) from Shah Alam Industrial asset acquisition. As a result, RNI margin was down 6.3ppt.

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 9.5-11.8% 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 ARR and occupancy.

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 but increase our TP to RM1.90 (from RM1.87) post rolling forward our valuations to FY19E GDPS/NDPS of 10.1/9.1 sen (from FY18E GDPS/NDPS of 10.0/9.0 sen), based on an unchanged target gross yield of 5.4% (net: 4.9%) on an unchanged +1.40ppt spread to the 10-year MGS target of 4.00%. Our applied spread is at the higher end of retail MREIT peers’ spreads (+0.8 to 1.4ppt) accounting for slight earnings fluctuations for the office and hotel segments. However, the largest portion of earnings is driven by SUNREIT’s stable retail component (74% of GRI). Even so, SUNREIT is commanding attractive gross yields of 5.9%, which is on par with retail MREITs’ average of 5.9% and close to MREIT peers (>RM1b market cap) at 6.1%, warranting an OUTPERFORM call. We are bullish on most MREITs (save for KLCC and AXREIT), premised on their attractive gross yield of 5.9-7.1% (5.3-6.4% net yield), on minimal earnings risk going forward, and backed by a stable MGS outlook.

Source: Kenanga Research - 07 Feb 2018