1HFY20 realised net income (RNI) of RM145.9m came in within consensus and our expectations at 47% and 51%, respectively. 1HFY20 GDPU of 4.95 sen is also within (at 50%). Going forward, we expect flattish-to-low single-digit reversions on lease expiries. Maintain FY20-21E CNP of RM289-296m and MARKET PERFORM on unchanged TP of RM1.90 (based on an implied FY20E yield of 5.2%).

1HFY20 realised net income (RNI) of RM145.9m came in within consensus and our expectations at 47% and 50%, respectively. 2QFY20 GDPU of 2.45 sen brought 1HFY20 GDPU to 4.95 sen which was also within our expectation at 50% of FY20E GDPU of 9.81 sen (implying gross yield of 5.2%).

Results highlight. YoY-Ytd, top-line was up by 9.9% on positive contributions from all segments; (i) retail segment (+0.9%), (ii) hotel segment (+15%) driven by at Sunway Resort Hotel and Spa, (iii) office segment (+11%) from all assets, (iv) industrial and Others segment (+10%) from better rental reversions at Shah Alam industrial asset, and (v) services segment on contributions from Sunway Medical and Sunway University & College Campus (SUCC). All in, RNI was up by 4.7% as top-line was weighed down by higher financing cost (+3.2%), higher expenditure (8.3%), as well as contributions to perpetual bond holders of RM5m. QoQ, top-line was fairly flattish (+0.3%), while weaker NPI margins (-1.8ppt) caused by higher property operating expenses caused bottom-line to decline by 2.1%.

Outlook. FY20-21 will see 33-13% 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 segment more actively over the longer run (i.e. industrial, healthcare, education, etc). 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 2HFY21 as well as enhancement of other assets. The Group remains cautious on the potential impact of the Covid-19 outbreak on the performance of the hotel and retail segments should it be prolonged. For now, there is no impact to retail in terms of shopper traffic but the hospitality segment has seen marginal cancellations and deferments of events albeit not significant at this juncture. 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. FY20- 21E NDPU is at 8.8-9.1 sen (4.7-4.8% 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) on concerns on the hospitality segment. 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 5.3%. 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 - 14 Feb 2020