• 6MFY17 earnings within expectations

• Retail division leading growth

• Earnings buoyed by retail division

• Maintain BUY with a revised TP of RM1.88

6MFY17 earnings within expectations. Sunway REIT (SUNREIT) 6MFY17 core net income of RM133.3m met expectations, accounting for 51% and 48% of our and consensus full year estimates respectively. SUNREIT declared distribution per unit (DPU) of 2.28sen for the quarter.

Retail division leading growth. SUNREIT 2QFY17 core net income was flattish yoy at RM66.5m, bringing 6MFY17 core net income to RM133.3m (+4%yoy). The higher earnings were mainly driven by the increased earnings contributions from retail division and Sunway Medical Centre which partly mitigated the weaker earnings from hotel and office divisions. Net property income (NPI) of retail division climbed 10.9%yoy to RM142.3m as Sunway Pyramid Shopping Mall, Sunway Carnival, and Sunway Putra Mall contributed higher rental income. Meanwhile, hotel segment recorded lower NPI of RM29.3m (-27.5%yoy) mainly due to loss of income from Sunway Pyramid Hotel which was closed for major refurbishment. Similarly, office division registered lower NPI of RM7.7m (-2.5%yoy) due to lower occupancy rates of its office buildings.

Earnings buoyed by retail division. We revised upwards our earnings forecast for FY17/18 by 1.8%/1.6% after factoring in the earnings contribution from the recently announced industrial asset acquisition. We forecast SUNREIT earnings to grow 6%yoy in FY17 as we continue to see positive earnings outlook for SUNREIT. We expect its retail division (contributed 74.6% of NPI in 6MFY17) to grow steadily, underpinned by higher rental from Sunway Pyramid, Sunway Carnival, and Sunway Putra Mall. Meanwhile, we expect office division to recover gradually in FY17 from low base in FY16 hence render limited earnings downside risk.

Maintain BUY with a revised TP of RM1.88. Corresponding to the upwards revision in earnings forecast, we increase our TP for SUNREIT to RM1.88 (previously: RM1.83). Our TP is based on Dividend Discount Model (Required rate of return: 7.1%, Perpetual growth rate: 1.9%). We continue to like SUNREIT for its solid retail assets which would continue spurring earnings growth going forward.

Source: MIDF Research - 15 Feb 2017