What’s New

• 2QFY17 earnings below expectations
• Earnings dragged by poor performance of hotel and office segments
• Retaining positive outlook on rising Sunway Putra contributions, asset-enhancement initiatives and asset-injection opportunities
• DPU of 2.28 sen was declared with ex-date of 27 Feb

Still positive

Still positive about its prospects. We cut our FY17/FY18/FY19 figures by 12%/13%/15% to take into account the weak performance of its hotel and office segments due to the weak market conditions. Most notably, in 2QFY17 Sunway Pyramid Hotel & Spa NPI plunged by 31% y-o-y to RM7.7m. Moreover, reversions from the retail segment were positive but lower than its historical figures. However, we remain positive on Sunway REIT (SunREIT) given its attractive distribution yield and growth potential from the asset-enhancement work done on Sunway Pyramid Hotel, slated to be fully completed by 4QFY17.

Asset enhancement underway. Sunway Pyramid Hotel was closed for refurbishment in April 2016 but has been progressively opened from 2QFY17. In 2QFY17, the average occupancy rate for the hotel stood at 78.2% based on total refurbished rooms of 316 rooms. The occupancy level before closure was at 55% with total inventory of 564 rooms. The hotel is expected to fully re-open in 4QFY17. The NPI foregone at full available room inventory (FY15: RM18m) will be offset by the recent inclusion of new assets.

Visible sponsor asset pipeline. Sunway REIT’s sponsor and major shareholder (37% stake) Sunway Bhd has a large pipeline of potential assets for injection under its “build-own-operate” model. Future injections could include Sunway University and Monash University campuses, The Pinnacle office tower, Sunway Giza mall, Sunway VeloCity mall and Sunway Pyramid Phase 3. This underpins an attractive growth pipeline for SunREIT. We are optimistic about potential injections from sponsor Sunway Bhd to meet SunREIT’s RM7bn asset target.

Valuation

Our DDM-derived TP declines to RM1.90 (BUY), with 7% cost of equity and 1% TG, as we adjust our forecast and roll forward our valuation.

Key Risks to Our View

Pace of acquisitions. Sunway REIT’s yields are on par with its larger M-REIT peers. The draw is the potential to secure steady acquisitions. On this note, any significant delay in acquisitions could hamper its share price appreciation, especially as its peers are also looking at asset growth.

Source: Alliance Research - 15 Feb 2017