INVESTMENT HIGHLIGHTS

• 9MFY18 earnings within expectation

• CNI for the period rose 6.8% yoy to RM217.5m

• 3QFY18 CNI was flat yoy at RM70.4m

• Maintain BUY with unchanged TP of RM1.90

9MFY18 earnings within expectation. Sunway REIT (SUNREIT)’s core net income (CNI) of RM217.5m made up 76.6% of our FY18 forecast and 75.2% of consensus’. A DPU of 2.37 sen was announced, bringing YTD DPU to 7.42 sen, also within expectation.

CNI for the period rose 6.8% yoy to RM217.5m as revenue grew 9% yoy to RM424.2m. Retail segment NPI grew 3.7% to RM226.3m due to positive rental reversion from Sunway Pyramid and Sunway Carnival while hotel segment jumped 39.5% to RM60.7m, mainly due to the full re-opening of Sunway Pyramid Hotel. Meanwhile, the office segment NPI is down slightly by 1.6% to RM12.1m due to maintenance costs at Menara Sunway. The addition of the Shah Alam industrial asset helped to boost the other segment by 26.4% to RM20.6m.

3QFY18 CNI was flat yoy at RM70.4m. While revenue grew 5%yoy to RM141.5m, it was offset by borrowing costs that rose 21.7%yoy to RM27.4m due to the higher borrowings drawn down for the acquisition of Sunway Clio as well as higher borrowing costs that averaged at 3.95% during the quarter versus 3.93% in 2QFY18.

The Sunway Clio acquisition was completed in February 2018 and has started contributing RM2.1m to its topline and RM1.9m to its bottomline during the quarter. The occupancy rate of the retail portion of Sunway Clio averaged at 58% in 3QFY18 but has since improved to 88% as at end March due to the progressive opening of tenants.

Development of Sunway Carnival expansion. The expansion works for Sunway Carnival started in 3QFY18 and is scheduled for completion by 3QFY21. The estimated property development cost of RM339m is inclusive of land cost, which is RM17.2m. Following the completion of the project, Sunway Carnival’s NLA is expected to increase by 330,000 sq ft or 72% to 787,920 sq ft. The cumulative cost incurred from initiation up to end-March was RM26.1m. Property development against its enlarged total asset value was at 4.5%, which is less than the 15% requirement set by SC.

Source: MIDF Research - 4 May 2018