INVESTMENT HIGHLIGHTS

• 1QFY18 earnings largely within expectation

• CNI climbed 18%yoy to RM78.7m

• Hotel NPI grew fastest at 44.2% yoy to RM22.2m

• Maintain BUY with unchanged TP of RM1.91

1QFY18 earnings largely within expectation. Sunway REIT (SUNREIT)’s core net income of RM78.7m accounted for 27.5% of our FY18 forecast and 28.4% of consensus’. A DPU of 2.67 sen was announced, which was within expectation.

CNI climbed 18%yoy to RM78.7m. The higher core net income is largely attributable to: 1) growth in all segments, which led to revenue growth of 6.8% yoy, 2) the lower maintenance expenses at Sunway Pyramid, which are expected to normalise in the coming quarters and 3) contribution from the Shah Alam industrial asset (+RM0.9m).

Hotel NPI grew fastest at 44.2% yoy to RM22.2m. The jump in hotel NPI is mainly due to the completion of refurbishment at Sunway Pyramid Hotel in June 2017, which led to higher inventory and net property income (NPI) contribution of RM4.4m as average occupancy rate rose to 71% from 62% in 4Q17. The increase in NPI is also contributed by the higher average occupancy and average daily rate at Sunway Putra Hotel, which has benefitted from the SEA Games and ASEAN Para Games in August and September resulting in a higher NPI of +RM2.4m yoy. However, average occupancy rate at Sunway resort hotel and spa fell by 3.9ppt due to softer pace of Middle Eastern guests, leading to the 3.5%yoy decline in NPI.

Sunway Pyramid NPI grew +9.7% to RM62.1m yoy as average occupancy rate increased by 0.9ppt to 98.8% alongside positive rental reversion. Sunway Pyramid remains biggest NPI contributor at 56% of SUNREIT’s NPI. In the retail segment, Sunway Carnival also saw NPI growth of 10.8% to RM8.2m mainly due to positive rental reversion and lower allowance for doubtful debts. Average occupancy rate for Sunway Carnival slid by -1.3ppt largely due to a one-month gap between operations of the new and old tenants.

Steady growth expected due to improvement from all divisions. Looking ahead, we expect steady yoy growth in the coming quarters from all the segments. We expect the office segment to remain flat while downside risk is limited. Any successes in securing sizeable tenants for the office assets will be a bonus. From 3Q onwards, we also expect contribution from Sunway Clio.

Earnings estimate maintained. We maintain our earnings growth of 5.9% for FY18, mainly driven by higher contribution from retail and hotel divisions. Besides, earnings contribution from SUNREIT’s industrial asset in Shah Alam and Sunway Clio should start in FY18.

Maintain BUY with unchanged TP of RM1.91. We make no changes to our TP as we maintain our earnings assumption and Dividend Discount Model-based valuation. We reaffirm our BUY call on SUNREIT due to the positive outlook for its retail and hotel divisions, which are anchored by Sunway Pyramid, Sunway Carnival and Sunway Pyramid Hotel. SUNREIT’s dividend yield is estimated at 5.1%.

Source: MIDF Research - 1 Nov 2017