FY19 realised net income (RNI) of RM282.3m came in within consensus expectation at 97% but missed ours at 94%. FY19 GDPU of 9.59 sen is also slightly below (94%). Going forward, we expect flattish-to-low single-digit reversions on lease expires. Lower FY20E CNP by 7.5%, and introduce FY21E of RM296m. Maintain MP but with a lower TP of RM1.80 (from RM1.90).

FY19 realised net income (RNI) of RM282.3m came in within consensus expectation at 97% but just missed ours at 94%. Top line barely came in within at 95% of our estimates, while slightly higher than-expected financing cost (102% of our FY19E) weighed down bottom-line margin to 48.7% (vs. our expectations of 49.1%). 4Q19 GDPU of 2.28 sen brought FY19 GDPU to 9.59 sen, also slightly below our expectation at 94% of FY19E GDPU of 10.2 sen (implying gross yield of 5.1%).

Results highlight. YoY-Ytd, top-line was up by 3.5% driven by: (i) retail segment (+2.4%), from higher rental from its star performer Sunway Pyramid, (ii) office segment (+14.8%) from improved occupancy at Sunway Putra Tower and Wisma Sunway, (iii) industrial and Others segment (+14.6%) from better rental reversions at Shah Alam industrial asset, and (iv) services segment from contributions from Sunway Medical and Sunway University & College Campus (SUCC), while the only drag was the challenging hospitality segment (-4.9%) as almost all asset contributions declined. NPI margin improved slightly (+0.84ppt) on better cost management at the asset level, but higher expenditure (+5.6%) and higher financing cost (+11.6%) resulted in a flattish RNI (+0.1%). Note that there was a positive fair value gain of RM108m in FY19A. QoQ, top-line was down by 3.9% due to the retail (- 4.4%) and hospitality (-39%) segments as it was a seasonally weaker quarter. However, this was offset by slight improvements in the office segment (+0.9%) as well as inclusion of SUCC. This coupled with higher expenditure (+8.9%), higher financing cost (+3.9%) and perpetual bond cost incurred for the recent acquisition, weighed down on RNI (-11.3%).

Outlook. We are expecting capex of RM250-100m in FY20-21 mostly for the construction of Sunway Carnival Extension, which is expected to be completed in 2H21 as well as enhancement of other assets. FY20 will see 41.1% of NLA up for renewal on the back of expectations of low-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).

Lower FY20E CNP by 7.5% to RM289m and introduce FY21E CNP of RM296m. We reduced our FY20E earnings after lowering reversions to low single-digit reversions for the retail segment (from mid single digit) as well as lower occupancy rates for the hospitality segment given the challenging outlook. This translates to FY20-21E NDPU of 8.8-9.1 sen (4.7-4.8% net yield).

Maintain MARKET PERFORM but on a lower Target Price of RM1.80 (from RM1.90). Our TP is based on a lower FY20E GDPS/NDPS of 9.8/8.8 sen (from 10.4/9.4 sen) and an unchanged +1.8ppt spread to the 10-year MGS target of 3.70%. 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 the challenging hospitality and office segments, and have accounted for this in our estimates and valuations. We are comfortable with our MARKET PERFORM call as SUNREIT’s gross yield of 5.2% is close to large cap MREIT peers’ average of 5.4% while we also believe we have already priced in most positives for now.

Source: Kenanga Research - 9 Aug 2019