1Q19 realised net income (RNI) of RM73.0m met consensus and our expectations at 24% and 25%, respectively. 1Q19 GDPU of 2.48sen is also within expectation (25%). Going forward, we expect flattish-to-mid single-digit reversions on lease expiries of 8.6-41.1% of NLA in FY19-20. Maintain FY19-20E CNP of RM298-302m. Maintain MARKET PERFORM and TP of RM1.60 on a +2.2ppt spread to the 10- year MGS.

1Q19 realised net income (RNI) of RM73.0m came in well within expectations, making up 24% and 25% of consensus’ and our estimates, respectively. 1Q19 GDPU of 2.48 sen includes a non-taxable portion of 0.50 sen, which is also within our expectation at 25% of FY19E GDPU of 10.1 sen (gross yields of 6.0%).

Results highlight. YoY-Ytd, GRI was up by 2% on positive growth from; (i) retail (+1.3%) from higher rental at Sunway Pyramid, but lower rental at Sunway Putra Mall on attractive rental packages to tenants on a selected basis, (ii) office (+13.0%) mostly from improvements at Sunway Putra Tower on better occupancy, and (iii) others segment (+10.3%) from the inclusion of the Shah Alam industrial asset in Aug 2017. Meanwhile, the hospitality segment declined marginally (-2.2%) due to ongoing refurbishments at Sunway Resort Hotel and Spa, but the inclusion of Sunway Clio hotel helped offset the weakness. All in, RNI declined by 7% mostly on; (i) higher operating cost (+10%) and, (ii) higher financing cost (+23%) from acquisition of Shah Alam Industrial asset and Sunway Clio hotel. QoQ, topline was up by 5% on contributions from; (i) retail (+3.6%) on higher rental from Sunway Pyramid and Sunway Putra Mall, and (ii) hospitality (+20.4%) mostly from the inclusion of Sunway Clio property, while the office and other’s segment were fairly flattish. This coupled with lower operating cost (- 8%) allowed NPI margins to improve by 3.3ppt, which translated to RNI increasing by 15%.

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, which will be internally funded. FY19 is not major lease expiry year (8.6% of NLA), but FY20 will see 41.1% of NLA up for renewal, on the Groups weighted average lease expiry (WALE) of 1.92 years currently. At present, we expect mid-single-digit reversions for retail, and flattish to low-single-digit reversions for office and hospitality assets. Additionally, the Group is looking to grow the Others segment more actively over the longer run (i.e. industrial, healthcare, education, etc).

Maintain FY19-20E CNP of RM298-302m. This translates to FY19-20E NDPU of 9.1-9.2 sen (5.4-5.5% net yield).

Maintain MARKET PERFORM and TP of RM1.60. Our TP is based on an unchanged FY19E GDPS/NDPS of 10.1/9.1 sen and a +2.2ppt spread to the 10-year MGS target of 4.20%. Our spread is on the higher-end vs. pure retail MREITs spread of +1.4 to +2.1ppt (save for CMMT at +2.4ppt due to its challenging assets) as we are mindful of certain asset weakness’ in the office and hospitality segment, and have accounted for the foreseeable risks in our estimates and valuations. We are comfortable with our MARKET PERFORM call as SUNREIT’s gross yields of 6.0% is close to large cap MREIT peers’ average of 6.3% while we also believe we have already priced in most positives for now.

Risks to our call include: (i) bond yield expansion or compression, (ii) stronger or weaker-than-expected earnings in retail, hospitality and office division.

Source: Kenanga Research - 2 Nov 2018