INVESTMENT HIGHLIGHTS

• 2QFY19 earnings within expectation

• 1HFY19 CNI declined by 7.2%yoy to RM139.4m

• 2QFY19 CNI fell by 2.9%yoy to RM66.4m

• Maintain BUY with unchanged TP of RM1.93

2QFY19 earnings within expectation. Sunway REIT (SUNREIT)’s core net income (CNI) of RM139.4m was in-line with expectations (47.8% of our full year forecast and 47.3% of consensus’). A DPU of 2.3 sen was announced, bringing year-to-date DPU to 4.7 sen (47% of our full year estimate).

1HFY19 CNI declined by 7.2% to RM139.4m compared to a year ago. This was mainly due to the decline in the contribution from its hotel segment. This came on the back of revenue that increased marginally by 0.2% to RM283.2m. Its office segment improved the most with net property income (NPI) jumped 35.5% to RM10.3m. Retail NPI improved by 3.0% to RM153.7m while hotel declined by 17.0% to RM36.5m.

2QFY19 CNI fell by 2.9% yoy to RM66.4m as revenue slid 1.4%yoy to RM139.5m. Retail segment NPI increased by 7% to RM75.9m due to lower advertising and promotion as well as maintenance expenses at Sunway Pyramid. Hotel segment NPI dropped by 27% to RM15.9m due to softer occupancy rates at 69% vs 75% in 2QFY18). This was also due to the partial closure of Sunway Resort and Spa for refurbishment. The grand ballroom and meeting rooms of Sunway Resort and Spa has been re-opened since mid-November 2018. Meanwhile, the office segment NPI increased by 43.4% to RM5.2m due to higher occupancy rate at Sunway Putra Tower and Wisma Sunway.

Sequentially, CNI fell 9% to RM66.4m compared to RM73.0m in 1QFY19 as revenue dipped 3% to RM139.5m. The lower CNI can be attributed to lower contribution from the retail segment (-RM1.4m) and hotel segment (-RM4.6m).

Acquisition of the education property expected to be completed by FY19 with contribution starting in FY20. The REIT manager has submitted the valuation report of the asset to Bursa on 17 January 2019. The acquisition price of the property is RM550m and will most likely to be funded through a combination of equity and debt as SUNREIT’s gearing has reach 38.5% as of 31 December 2018, which is just shy of the REIT manager’s internal target of 40%. We have not imputed contribution from this acquisition.

FY19F and FY20F forecasts unchanged. We maintain our earnings forecasts as the results are in-line.

Maintain BUY with unchanged TP of RM1.93. We make no changes to our assumptions. Our Dividend Discount Model-based valuation (required rate of return of 7.4%; terminal growth rate of 2.0%) is maintained. We like SUNREIT for its integrated asset clusters and stable prospects from its crown jewel Sunway Pyramid Mall. Dividend yield is estimated at 5.1%.

Source: MIDF Research - 15 Feb 2019