1H19 realised net income (RNI) of RM139.4m met consensus and our expectations at 47%, each. 1H19 GDPU of 4.73 sen is also within expectations (46%). 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 RM300-312m and MARKET PERFORM and TP of RM1.65 on a +2.2ppt spread to the 10-year MGS.

1H19 realised net income (RNI) of RM139.4m came in well within expectations, making up 47% of consensus and our estimates, respectively. 2Q19 GDPU of 2.25 sen includes a non-taxable portion of 0.40 sen, bringing 1H19 GDPU to 4.73 sen which is also within our expectation at 47% of FY19E GDPU of 10.2 sen (implying gross yield of 5.8%).

Results highlight. YoY-Ytd, GRI was flattish (+0.2%). Marginal improvements in the; (i) retail segment (+1.4%) buoyed by higher rental at Sunway Pyramid, (ii) office segment (+16.0%) from improvements at Sunway Putra Tower and Wisma Sunway on slightly higher occupancy, and (iii) the Others segment (6.4%) from the inclusion of Shah Alam industrial assets in Aug 2017 were offset by decline in the hospitality segment (-12.5%). This was due to the overall softer hospitality market as well and further weakness from Sunway Resort Hotel and Spa (SRHS) due to ongoing refurbishments, and Sunway Putra Hotel from the lack of demand of corporate bookings. All in, RNI declined by 6% due to higher financing cost (+20%) from acquisition of Shah Alam Industrial asset and Sunway Clio hotel. QoQ, top-line was down by 3% due to the hospitality segment (-22%) as a result of the soft hospitality market witnessed in all hospitality assets, while remaining segments were flattish to mildly positive such as: retail (+0.4%), Others segment (0.0%), and office (+3.4%) from marginal rental increase at Wisma Sunway due to improved occupancy. This coupled with higher operating cost (+6%) dragged down RNI by 9%.

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 is not major lease expiry year (8.6% of NLA), but FY20 will see 41.1% of NLA up for renewal. 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). We reckon that SUNREIT may opt to raise equity financing in the near term as we expect its gearing to increase to 0.43-0.45x in FY19-20E (from 0.39x currently), which is close to MREITs’ maximum gearing limit of 0.50x.

Maintain FY19-20E CNP of RM300-312m. This translates to FY19-20E NDPU of 9.2-9.5 sen (5.3-5.5% net yield).

Maintain MARKET PERFORM and TP of RM1.65. Our TP is based on FY20E GDPS/NDPS of 10.6/9.5 sen (from FY19E) and an unchanged +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 +2.6ppt due to its challenging assets) as we are mindful of certain asset weakness in the hospitality and office segment, and have accounted for this in our estimates and valuations. We are comfortable with our MARKET PERFORM call as SUNREIT’s gross yields of 6.1% is close to large cap MREIT peers’ average of 5.8% while we also believe we have already priced in most positives for now.

Source: Kenanga Research - 15 Feb 2019