SUNREIT’s 9MFY23 results met expectations. Its 9MFY23 core net profit grew 4% YoY as improved rental and lease incomes were partially eroded by higher electricity and interest costs. It is positive on the outlook for its hotel and retail segments but less so for the office segment. We maintain our forecasts, TP of RM1.63 (based on a 6.5% target yield) and OUTPERFORM call.

9MFY23 within expectations. SUNREIT’s core net profit for 9MFY23 of RM245.7m met expectations, making up 77%/73% for our full-year forecast/the consensus full-year estimate. No dividend was declared, in accordance with its semi-annual distribution policy.

YoY, its 9MFY23 revenue increased by 13% primarily driven by an uptick in the hotel segment (+49%), attributable to improved occupancy rate of 63% YTD (vs 9MFY22: 54%) with full room occupancy at Sunway Resort Hotel since July 2023. The growth was further supported by the retail segment (+13%) which benefited from consistent retail sales and foot traffic across all its retail malls. Although there was an increase in revenue, the net property income only experienced an 11% rise, mainly due to higher operating expenses resulting from increased electricity costs. Not helping bottom-line was a spike in financing cost from the full effect of a 100 bps rise in OPR. All in, its 9MFY23 core net profit grew +4%.

Outlook. As international and domestic visitors return, along with tenant sales and footfall recovering to pre-pandemic levels, it is likely that the business momentum will continue to sustain into the upcoming quarters. We opine that forward earnings will continue to be supported by its hotel segment that has improved in 3QFY23, and this positive trajectory is anticipated to persist, driven by increased interest in domestic leisure, a rise in international tourist arrivals, and higher engagement in corporate and MICE (Meetings, Incentives, Conferences, and Exhibitions) activities.

The retail segment's on-going finalisation of accounts for Sunway Carnival Mall expansion and refurbishment, scheduled for completion by end of 2025, may result in increased rental accretion. While the office segment is expected to confront challenges due to an oversupply resulting from continuous incoming supply, potential support lies in the reinvention of office buildings through Asset Enhancement Initiatives. These initiatives aim to provide improved flexibility and appeal, increasing their attractiveness to a wider tenant base.

Forecasts. Maintained.

Maintain OUTPERFORM and TP of RM1.63. Our TP is based on our FY24F gross DPU of 10.6 sen against an unchanged target yield of 5.5% (derived from a 2.5% yield spread above our 10-year MGS assumption of 4.0%). 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 given a 3-star rating as appraised by us (see Page 4). SUNREIT is one of our sector Top Picks.

Risks to our call include: (i) bond yield expansion, (ii) lower-thanexpected rental reversions, and (iii) lower-than-expected occupancy rates.

Source: Kenanga Research - 17 Nov 2023