• FY17 earnings in line

• Retail division stays resilient

• Earnings outlook for hotel division improves

• Better occupancy rates of office buildings

• Maintain BUY with a revised TP of RM1.93

FY17 earnings in line. Sunway REIT (SUNREIT) FY17 core net income of RM270.4m came in within expectations, meeting 100% of our and consensus estimates respectively. SUNREIT declared distribution per unit (DPU) of 2.27sen for the quarter, bringing total DPU in FY17 to 9.19sen or equivalent to net dividend yield of 4.8%.

Retail division stays resilient. SUNREIT recorded 4QFY17 core net income of RM66.8, increasing 12.4%yoy. That brought full year earnings in FY17 higher at RM270.4m (+7.2%yoy), underpinning by higher contribution from retail division. Net property income (NPI) of retail division grew 7.6%yoy to RM290m, contributed by increasing contribution from Sunway Pyramid, Sunway Carnival, and Sunway Putra Mall. Going forward, we expect earnings from the division to remain resilient as we expect Sunway Pyramid and Sunway Carnival to remain stable on the back of positive rental reversion outlook and high occupancy rates. Meanwhile, performance of Sunway Putra Mall should be marginally better going forward.

Earnings outlook for hotel division improves. NPI of hotel division in FY17 eased 11.9%yoy to RM60.6m, mainly due to closure of Sunway Pyramid Hotel since April 2016 for refurbishment. Nevertheless, we expect earnings of the division to recover in FY18 as Sunway Pyramid Hotel has fully re-opened in 4QFY17. Besides, the recently announced acquisition of Sunway Clio (expect to complete by 2QFY18) is expected to lift earnings of hotel division due to NPI guarantee of RM20.2m per annum for four years.

Better occupancy rates of office buildings. NPI of office division recovered in FY17 from low base in FY16 by climbing 13.8%yoy RM16.5m, driven by better occupancy rates of its office buildings. While our expectation of earnings recovery of the division in FY16 has materialised, we estimate recovery of the division going forward to be moderate due to soft office market condition in Klang Valley. Nevertheless, earnings downside risk from the division is limited as earnings contribution from the division to overall earnings is insignificant at less than 5%.

Maintain BUY with a revised TP of RM1.93. We revise upwards our FY18 earnings forecast by 2.8% after housekeeping figures post release of FY17 earnings and inputting earnings contribution from Sunway Clio. We are forecasting FY18 earnings to grow 12.8% to RM305m due to overall better contributions from all divisions. We also introduce our earnings forecast for FY19. Post upward revision in earnings and DPU forecast, our Dividend Discount Model-based TP has revised to RM1.93 (from RM1.88). We continue to like SUNREIT due to its positive earnings outlook. SUNREIT will remain as a retailfocused REIT despite the maiden foray into industrial asset in January this year, hence we believe the resilient retail division (Sunway Pyramid, Sunway Carnival, Sunway Putra Mall) will continue to spur earnings growth going forward.

Source: MIDF Research - 11 Aug 2017