FY18 realised net income (RNI) of RM281.9m met consensus and our expectations at 99% and 96%, respectively. FY18 GDPU of 9.57 sen is also within expectation (96%). Going forward, we expect low-to-mid single-digit reversions on minimal lease expiries of 13.4-39.8% of NLA in FY19-20. We maintain FY19E CNP of RM298m and introduce FY20E CNP of RM302m. Maintain MARKET PERFORM but increase TP to RM1.60 on a narrower spread of +2.2ppt to the 10-year MGS.

FY18 realised net income (RNI) of RM281.9m came in well within expectations, making up 99% and 96% of consensus and our estimate, respectively. 4Q18 GDPU of 2.15 sen includes a non-taxable portion of 0.81 sen, bringing FY18 GDPU to 9.57 sen which is also within our expectation at 96% of FY18E GDPU of 10.0 sen.

Results highlight. YoY-Ytd, GRI was up by 7% on positive growth from all segments; (i) retail (+2.8%) on all assets backed by stable occupancy and positive reversions, save for SunCity Ipoh Hypermarket, (ii) hospitality (+28.2%) from Sunway Putra Hotel, Sunway Hotel Georgetown, and the new inclusion of Sunway Clio property, (iii) office (+6.3%) on most assets and, (iv) others segment from the inclusion of the Shah Alam industrial asset (+27%) in Aug 2017. However, RNI growth was weighed down slightly to +4% on; (i) higher expenditure (+9%) and (ii) higher financing cost (+18%) from acquisition of Shah Alam Industrial asset and Sunway Clio property. QoQ, GRI was down by 4% due to: (i) retail segment (-6.2%) from Sunway Pyramid and Sunway Carnival as turnover rent had likely peaked in the previous quarter, and (ii) hospitality segment (-3.6%) due to slightly lower occupancy at Sunway Resort Hotel and Spa (SRHS); despite the office segment faring better (+7.6%) on improved occupancy at Sunway Putra Tower. This trickled to bottom-line which declined by 9% on slightly higher expenditure (+1%) and financing cost (+6%) due to similar reasons mentioned above.

Outlook. FY19E capex will mainly be allocated for Sunway Carnival Extension, with construction beginning in 2H18 till 2H21. As such, we are expecting capex of RM120-250m in FY19-20. FY19-20 is not major lease expiry years with only 13.4-39.8% of NLA up for renewal, while the Group has a weighted average lease expiry (WALE) of 1.99 years currently. Going forward, we expect mid-single-digit reversions for retail and low-single-digit reversions for office assets, as well as mildly positive growth for the hospitality segment’s ADR and occupancy.

Maintain FY19E CNP of RM298m and introduce FY20E CNP of RM302m on minimal expiries in FY19 and single-digit reversion growth. This translates to FY19-20E NDPU of 9.1-9.2 sen (5.2-5.3% net yield).

Maintain MARKET PERFORM on a higher TP of RM1.60 (from RM1.55). Our TP is based on an unchanged FY19E GDPS/NDPS of 10.1/9.1 sen but on a lower spread of +2.2ppt (from +2.40ppt) to the 10- year MGS target of 4.20%. We lower our spread marginally in light of more stability from its hospitality and office segments, which have both seen improvements YoY. To recap, our increased spread previously was also a buffer for near-term fluctuations to the MGS on oversupply issues and interest rate hikes. However, we may look to narrow our spreads for all MREITs in the near term once these concerns are put to rest. We are comfortable with our call as SUNREIT’s gross yields of 5.8% are close to large cap MREIT peers’ average of 6.0% while we also believe we have already priced in most positives for now.

Source: Kenanga Research - 10 Aug 2018