INVESTMENT HIGHLIGHTS

• 9MFY17 earnings within expectations

• Earnings growth driven by retail segment

• Positive earnings outlook

• Maintain BUY with an unchanged TP of RM1.88

9MFY17 earnings within expectations. Sunway REIT (SUNREIT) 9MFY17 core net income of RM203.6m came in within expectations, meeting 76% and 75% of our and consensus full year estimates respectively. SUNREIT declared distribution per unit (DPU) of 2.37sen for the quarter.

Earnings growth driven by retail segment. SUNREIT 3QFY17 core net income grew 8.6%yoy to RM70.4m, bringing 9MFY17 core net income to RM203.6m (+5.6%yoy). The growing earnings were primarily driven by stable performance of retail segment. 9MFY17 net property income (NPI) of retail segment increased by 8.2%yoy to RM218.2m, on the back of higher contribution from Sunway Pyramid, Sunway Carnival, and Sunway Putra Mall. Meanwhile, Net Property Income (NPI) of hotel segment eased 21.9%yoy to RM43.5m mainly due to temporary loss of income from Sunway Pyramid Hotel, which was fully closed for refurbishment since April 2016. On a brighter note, NPI of office division in 3QFY17 recovered on a sequential basis, improving by 12.5%qoq due to higher occupancy rates of its office buildings. That leads 9MFY17 NPI of office division to increase by 16%yoy to RM12.3m, in line with our expectation of recovery in earnings from office segment in FY17.

Positive earnings outlook. We maintain our earnings forecast for FY17/18. We forecast FY17 earnings to grow by 6%yoy in FY17, driven mainly by retail division. Retail division which contributed to 75% of total NPI in 9MFY17 is expected to contribute higher NPI as we expect stable performance from Sunway Pyramid, Sunway Carnival, and Sunway Putra Mall. Meanwhile, earnings contribution from hotel segment should recover by end FY17 as Sunway Pyramid Hotel is expected to be fully re-opened by 4QFY17. On the other hand, we continue to expect mild recovery in office division as we estimate occupancy rates to improve from low base in FY16.

Maintain BUY with an unchanged TP of RM1.88. Our TP is based on Dividend Discount Model (Required rate of return: 7.1%, Perpetual growth rate: 1.9%). We like SUNREIT for its quality retail assets namely Sunway Pyramid and Sunway Carnival which will support stable and sustainable earnings growth going forward.

Source: MIDF Research - 4 May 2017