1QFY20 realised net income (RNI) of RM73.7m came in within consensus and our expectations at 24% and 26%, respectively. 1QFY20 GDPU of 2.50 sen is also within (25%). We are expecting flattish-to-low single-digit reversions on lease expiries. Maintain FY20-21E CNP of RM289-296m. Maintain MARKET PERFORM on an unchanged TP of RM1.90.

1QFY20 realised net income (RNI) of RM73.7m came in within consensus and our expectations at 24% and 26%, respectively. 1QFY20 GDPU of 2.50 sen was also within our expectations at 26% of FY20E GDPU of 9.81 sen (implying gross yield of 5.4%).

Results’ highlight. YoY, top-line was up by 8.1% on positive contributions from all segments; (i) retail segment (+0.6%), from all assets, (ii) hotel segment (+4.8%) driven by Sunway Resort Hotel and Spa, (iii) office segment (+11.6%) from Sunway Tower and Wisma Sunway, (iv) industrial and Others segment (+9.9%) from better rental reversions at its Shah Alam industrial asset, and (v) services segment from contributions from Sunway Medical and Sunway University & College Campus (SUCC). However, RNI was only up by 1% on higher operating cost (+9.2%) from higher A&P, and higher financing cost (+2.4%), expenditure (+9.2%) and perpetual bond contributions of RM5m from recent asset acquisitions. QoQ, top-line was up by 6.7% from contributions from the hospitality segment driven by SRHS and Sunway Clio due to seasonality factors resulting in better occupancy. NPI margin was up (+0.2ppt), while RNI was up by 9.8% despite marginally steeper financing cost (+1.4%) and higher expenditure (+2.3%).

Outlook. We are expecting capex of RM150-200m 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. The Group is continuously looking to grow the Others (i.e. industrial, healthcare, education, etc). segment more actively over the longer run

Maintain FY20-21E CNP of RM289-296m. Our FY20-21E earnings are driven by low single-digit reversions for the retail segment and flattish reversions for the office segment given the oversupply situation. This translates to FY20-21E NDPU of 8.8-9.1 sen (4.8-5.0% net yield).

Maintain MARKET PERFORM and TP of RM1.90. Our TP is based on FY20E GDPS/NDPS of 9.8/8.8 sen and an unchanged +1.7ppt spread to the 10-year MGS target of 3.40%. Our spread is on the higher-end vs. pure retail MREITs’ spread of +1.3 to +1.7ppt (save for CMMT at +2.6ppt 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 5.4% is close to large cap MREIT peers’ average of 5.4%. Furthermore, we believe we have priced in most positives for now.

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

Source: Kenanga Research - 6 Nov 2019