Kenanga Research & Investment

Sunway REIT - Marginally Above Expectations

Publish date: Thu, 19 May 2022, 09:29 AM

1QFY22 realised net income (RNI) of RM83.1m came in above our and consensus’ expectations at 31% and 32%, respectively. No dividends, as expected. Going forward, we expect continuous earnings improvements with the reopening of the economy driven by the Group’s retail segment. Increase FY22-23E CNP by 8% each on lower rental rebates in coming quarters. Maintain MP but on a slightly higher TP of RM1.40 (from RM1.30) post rolling valuation forward to FY23 but on a higher 10-year MGS target of 4.40%.

1QFY22 realised net income (RNI) of RM83.1m came in above our and consensus expectations at 31% and 32%, respectively, on a stronger- than-expected top-line due to lower-than-expected rental rebates. No dividend, as expected.

Results’ highlight. YoY, top-line was up by 48% on higher contributions from all segments, in line with the reopening of the economy, predominantly the retail segment (+84%) on increased shopper traffic, lower rental assistance and increased demand during the festive season, hospitality (+29%), industrial (+10%), services (+3.2%) and office (+0.7%). All in, RNI was up by 160% on lower operating cost (-5.9%) and financing cost (-8.6%). QoQ, top-line was actually up by 11% (post excluding RM19.6m unrealised unbilled lease income receivable in the previous quarter), with the growth driven by the group’s main segment of retail in tandem with the re-opening of the economy. All in, RNI was up by 22% on slightly lower financing cost (-2.5%).

Outlook. Going forward, we expect the economy to remain fully open with slim chances for further lockdown. As such we expect improved shopper traffic, and better hotel occupancy rates. That said, we do not discount the possibility of further rental rebates in coming months. The office and services segments are also expected to remain stable. The Group is keen on property acquisitions, targeting Services and Industrial & Others segments, as well as overseas acquisitions. SUNREIT recently acquired a new investment property at Port Klang which will be re-developed into a seafront tourist destination, with details of the development still at preliminary stage.

Increase FY22-23E RNI by 8% each to RM293-320m on expectation of lower rental holidays in coming months, although we do not fully discount the possibility of such occurrences in the future. FP22E/FY23E NDPU of 7.3/8.0 sen provide 5.1/5.5% net yield.

Maintain MARKET PERFORM but on a higher TP of RM1.40 (from RM1.30). Our TP is post rolling forward our valuation base to a higher FY23E GDPS / NDPS 8.9 sen/ 8.0 sen, and unchanged spread of +1.9ppt (at +0.5SD) but on a higher 10-year MGS target of 4.4% (from 3.9%) in line with our in-house estimates. We expect better earnings in coming quarter as the economy continue to normalise and favour the Groups retail segment, but we are mildly cautious for SUNREIT’s challenging hospitality and office segments and we have priced such sentiment into our earnings estimates and valuations.

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

Source: Kenanga Research - 19 May 2022

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