INVESTMENT HIGHLIGHTS

• 1QFY18 earnings likely to be in line

• Retail division is still the shining star

• Hotel division to see growth

• Earnings estimate fine-tuned

• Maintain BUY with a revised TP of RM1.91    

1QFY18 earnings likely to be in line. Sunway REIT (SUNREIT) is scheduled to release its 1QFY18 earnings on 31 October 2017. We estimate core net earnings of SUNREIT in 1QFY18 to be in the range of RM65m-RM70m, which should come in broadly within consensus expectations.

Retail division is still the shining star. We are forecasting higher earnings in 1QFY18 mainly driven by retail division. We expect its crown jewel, Sunway Pyramid, to deliver positive rental reversion estimated in midsingle digit due to high occupancy rate of 98%. Similarly, we expect Sunway Carnival to remain resilient and expect the mall to register a positive singledigit rental reversion. Meanwhile, performance of Sunway Putra Mall is expected to remain subdued due to flattish to negative rental reversion outlook. Overall, retail division is still the key earnings contributor to SUNREIT where net property income (NPI) contribution from the retail segment is expected to remain above 70%.

Hotel division to see growth. We expect earnings growth from the hotel division mainly due to earnings contribution from Sunway Pyramid Hotel, which was reopened in June this year after some refurbishment works. Its average occupancy rate was at 62% in 4QFY17 but we expect occupancy rate to improve going forward. The others segment, which includes Sunway Medical Centre, is estimated to record stable growth. Meanwhile, we expect the office segment to remain flat. We see limited downside risk from its office segment at this point and any successes in securing sizeable tenants for the office assets will be a bonus.

Earnings estimate fine-tuned. We revise downwards our earnings forecast for FY18/19 by 5.9%/6.9% for housekeeping reason and input the flattish performance of Sunway Putra Mall. Nevertheless, we are still forecasting decent earnings growth of 5.9% for FY18, mainly driven by higher contribution from retail and hotel divisions. Besides, maiden earnings contribution from industrial asset in Shah Alam and Sunway Clio will lift earnings of SUNREIT in FY18.

Maintain BUY with a revised TP of RM1.91. Post downward revision in earnings and DPU forecast, our Dividend Discount Model-based TP has revised to RM1.91 (from RM1.93). Maintain BUY on SUNREIT due to positive outlook for its retail division which underpinned by Sunway Pyramid and Sunway Carnival. Organic growth and assets acquisitions will spur earnings growth of SUNREIT. Meanwhile, dividend yield is estimated at 5.1%

Source: MIDF Research - 30 Oct 2017