9MFY20 realised net income (RNI) of RM206.5m came in broadly within ours (82%) on expectation of a weak 4QFY20 but below consensus’ at 72%. No dividends declared in 3QFY20 as it adopts a semi-annual pay-out policy. Going forward, we expect flattish reversions with the possibility of rental rebates or deferments for retail tenants in the aftermath of Covid-19. Maintain FY20-21E CNP of RM253- 296m. A MARKET PERFORM with higher TP of RM1.65 (from RM1.55) on an implied FY21E gross yield of 5.8%.

9MFY20 realised net income (RNI) of RM206.5m came in broadly within our estimate at 82% but below consensus’ at 72% as we expect 4QFY20 to be weak given the MCO and extended CMCO until 9th June which is impacting the retail and hospitality segment. No dividend was announced for 3QFY20 as the Group is changing the frequency of distribution from quarterly to semi-annually going forward. This is to preserve cash, a priority for the group in light of the uncertainty surrounding the Covid-19 pandemic.

Results’ highlight. YoY-Ytd, top-line was up by 4% on positive contributions from: (i) the office segment (+10%), (ii) services segment (>100%) from contributions from Sunway Medical and Sunway university & college campus, and (iii) industrial segment (+6.5%) from better rental reversions at its Shah Alam industrial asset, despite being dragged down by the retail segment (-3.2%) on rental support given during the MCO for non-essential tenants, and hotel segment (-3.3%) on lower occupancy in light of the MCO. All in, RNI was down by 4%, dragged down by higher financing cost (+2.4%), higher expenditure (+5.7%), as well as contributions to perpetual bond holders of RM15m YTD. QoQ, top-line was down by 9.6% due to weakness in the retail (- 7.2%) and hotel (-32%) segments, but this was mildly mitigated by the positive improvements from offices (+3.5%), and services segment (+2.3%) on positive rental reversions. This trickled straight to bottom line which decreased by 16% despite lower financing cost (-4.9%) and expenditure (-7.1%).

Outlook. FY20-21 will see 21-11% of NLA up for renewal on the back of expectations of flattish to mildly positive reversions for offices and prime retail assets, and potential rental rebates or deferments for some retail tenants on a case-to-case basis and the severity of the Covid-19 situation on tenant’s sales. The Group remains cautious on the potential impact of the coronavirus outbreak on the performance of the hotel and retail segments which have taken the hardest hit, while the office and services segment are expected to remain stable for now.

Maintain FY20-21E CNP of RM253-296m. To recap, we recently trimmed SUNREIT’s earnings by 12-5% for FY20-21 in our recent MREITs 2QCY20 strategy on expectations of disruptions from Covid- 19, and the need for rental support or rebates. We made no changes to earnings for now but will continue to monitor the situation in the event of a possible second wave or prolonged MCO that may affect FY21 earnings further. FY20-21E NDPU of 6.9-8.6 sen provide 4.4-5.4% net yield.

Maintain MARKET PERFORM and increase TP to RM1.65 (from RM1.55). Our TP is based on an unchanged FY21E GDPS/NDPS of 9.5/8.6 sen and an unchanged +2.5ppt spread to a lower 10-year MGS target of 3.30% (from 3.70%) in line with the sector. Our applied spread is at +2.0SD, on par with other MREITs under coverage (save for AXREIT) to account for earnings risk in light of the Covid-19 pandemic considering its exposure to retail and hospitality segments. We are comfortable with our MARKET PERFORM call as SUNREIT’s gross yield of 6.0% is close to large cap MREIT peers’ average of 6.1%.

Source: Kenanga Research - 20 May 2020