SUNREIT’s 1HFY23 core earnings of RM158.8m (+4% YoY) and YTD distributions of 4.6 sen were within expectations. The group remains poised to benefit from the return of consumers across its portfolio while its office segment is expected to remain stable. At the meantime, various undergoing refurbishment and acquisitions could support near-term earnings growth. Maintain OP and TP of RM1.93 (based on a 5.5% target yield).

1HFY23 within expectations. SUNREIT's core net profit for 1HFY23 of RM158.8m met expectations, making up 50%/47% for our full-year forecast/consensus full-year estimate. The interim distribution of 4.6 sen per unit is also in line with our expectation to a full-year distribution of 8.8 sen for FY23.

YoY, revenue for 1HFY23 increased by 17.0% to RM349.3m, primarily driven by strong retail performance (+19%) from the recovery in tenancy and footfall in its major malls. Hotel operations (+47%) also contributed to its growth from an overall improvement in the average occupancy rates. Despite the rise in revenue, net property income only rose by 13%, influenced by heightened operating expenses, arising from elevated utility costs due to ICPT adjustments. Adjusting for RM18.3m revaluation gain seen in 1HFY22 and sukuk, 1HFY23 core net profit stood at RM158.8m (+4%).

Outlook. With business operations close to pre-pandemic levels, the earnings trend observed in 1HFY23 is expected to remain steady in the coming quarters. We opine that forward earnings will continue to be supported by its retail segment that is planning to acquire six hypermarkets and expand Sunway Carnival Mall, with the completion targeted between early 2024 and end of 2025. Additionally, plans to reconfigure Sunway Pyramid’s anchor tenant area with speciality stores could translate to more accretive rentals. The hotel segment's occupancy rates are expected to continue improving in 2HFY23, primarily driven by the growth in domestic leisure, corporate, and MICE (Meetings, Incentives, Conferences, and Exhibitions) activities with a gradual recovery in international tourist arrivals. Meanwhile, the office segment could be supported through asset enhancement initiatives (AEI), capitalizing on the co-working trend for increased flexibility and the transformation of office buildings will appeal to a broader tenant base. Notably, the Group has established a partnership with HSBC Bank Malaysia Berhad to implement an industry-first sustainability-linked cross-currency swap valued at RM200m. This collaboration underlines Sunway REIT's pioneering commitment to advancing sustainable finance within the Malaysian REIT industry.

Forecasts. Post results, our FY23F/FY24F earnings are largely unchanged.

Maintain OUTPERFORM and TP of RM1.93. Our TP is based on our FY24F gross DPU of 10.6 sen against an unchanged target yield of 5.5% (derived from a 1.0% yield spread above our 10-year MGS assumption of 4.5%). The low yield spread reflects SUNWAY’s diversified asset portfolio in key urban regions. We reckon that the group’s brand equity also benefits greatly from its affiliation to the Sunway Conglomerate. There is no adjustment to our TP based on ESG of which it is given a 3-star rating as appraised by us. SUNREIT is one of our sector Top Picks.

Source: Kenanga Research - 18 Aug 2023