9M19 realised net income (RNI) of RM215.2m came in well within consensus and our expectation at 74% and 72%, respectively. 9M19 GDPU of 7.31 sen is also within expectation (72%). 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 RM1.85 on a +1.8ppt spread to the 10-year MGS.

9M19 realised net income (RNI) of RM215.2m came in well within consensus and our expectation, at 74% and 72%, respectively. 3Q19 GDPU of 2.58 sen includes a non-taxable portion of 0.47 sen, bringing 9M19 GDPU to 7.31 sen which is also within our expectation at 72% of FY19E GDPU of 10.2 sen (implying gross yield of 5.4%).

Results highlight. YoY-Ytd, top-line was up by 2.5% on improvements from: (i) retail segment (+1.8%), driven by higher rental from its star performer Sunway Pyramid, (ii) office segment (+16.5%) from improved occupancy at Sunway Putra Tower and Wisma Sunway, and, (iii) others segment (+5.8%) from better rental reversions at Shah Alam industrial asset. All in, higher expenditure (+4%) and higher financing cost (+14%) due to higher average cost of debt to fund acquisitions and planned capex caused RNI to decline marginally by 1.6%. QoQ, topline was up by 8.6% on positive contributions from all segments, mainly ; (i) retail segment (+5.1%) driven by higher rental at Sunway Pyramid as well as Sunway Carnival, (ii) hospitality segment (+32.6%) from improved contributions from Sunway Resort Hotel and Spa (SRHS) post completion of refurbishment works in end-2018 and Sunway Clio property, (iii) Office segment on higher contributions from all assets mostly from improved occupancy, and (iv) Others segment from better rental reversions at Shah Alam industrial asset and marginal step-up for Sunway Medical Centre. All in, RNI margin improved by 2.4ppt on slightly lower expenditure (-0.5%) and financing cost (-1.7%) on lower borrowings this quarter, allowing RNI to increase by 14.1%.

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 a 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). The recent RM340m Perpetual Bond issuance to part fund Sunway’s Education assets has minimal impact on earnings (<2%). Future acquisitions may utilise either existing borrowings, part financing using Perpetual Bonds or even placement if suitable, depending on the assets yields (refer overleaf).

Maintain FY19-20E CNP of RM300-312m. This translates to FY19-20E NDPU of 9.2-9.5 sen (4.9-5.1% net yield).

Maintain MARKET PERFORM and Target Price of RM1.85. Our TP is based on FY20E GDPS/NDPS of 10.6/9.5 sen and an unchanged +1.8ppt spread to the 10-year MGS target of 3.90%. Our spread is on the higher end vs. pure retail MREITs’ spread of +1.3 to +1.8ppt (save for CMMT at +2.4ppt 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 yield of 5.7% is close to large cap MREIT peers’ average of 5.6% while we also believe we have already priced in most positives for now.

Source: Kenanga Research - 3 May 2019