INVESTMENT HIGHLIGHTS

• FY19 earnings were in-line with expectations

• CNI for the year improved by 2.0%yoy to RM286.5m

• 4QFY19 CNI jumped 12.4%yoy to RM71.3m

• Sunway Pyramid and Sunway University and College expected to drive growth in FY20E

• Maintain BUY with an unchanged TP of RM2.02

FY19 earnings were in-line with expectations making up 98% of ours and 99% of consensus’ estimates. A DPU of 2.28 sen was announced, bringing ytd DPU to 9.6 sen, which is also within with our expectation.

CNI for the year improved by 2.0%yoy to RM286.5m as revenue climbed 3.5%yoy to RM580.3m. Core net income did not rise as much as the growth in revenue mainly due to higher finance costs (+11.4%yoy to RM117.7m) and other trust expenses (+20.4%yoy to RM3.8m). Higher average cost of debt (4.02% vs 3.98% a year ago), loan amount and one-off fees to fund the education asset had led to the increase in finance expenses. On top of that, other income fell from RM2.07m to RM0.14m while interest income fell 17%yoy to RM5.17m due to lower funds placed in the money market.

Net property income (NPI) was up by 4.7%yoy to RM439.7m for FY19. The higher NPI can be attributed to growth in all the segments except the hotel segment, which fell by 8% to RM71.3m. NPI for the other segments was at: retail (+5% to RM296.9m), office (+22% to RM21.4m) and services (+35% to RM30.7m) as well as industrial and others (+15% to RM5.9m). The growth in retail segment is supported by Sunway Pyramid as NPI increased by 8%yoy to RM237.9m. Sunway Purta Mall NPI, however, dropped by 15.2%yoy to RM21.9m. Sunway Resort and Spa NPI fell by 48%yoy to RM18.6m due to down time from the refurbishment and lower room occupancy. Hotel NPI is cushioned by the addition of Sunway Clio which contributed RM20.5m compared to RM4.6m in the preceding year.

4QFY19 CNI jumped 12.4%yoy to RM71.3m as revenue climbed 6.8%yoy to RM145.6m driven by improvement in all segments except for the hotel segment. The Sunway University and College acquisition has also contributed to the income in this quarter. We have excluded RM107.7m of fair value gain of investment properties from the CNI. NPI for the quarter increased 10.9%yoy to RM111.2m driven by: retail (+9% to RM77.2m), office (+8% to RM5.9m), services (+129% to RM13.2m) and industrial (+10% to RM1.5m). Hotel segment NPI declined by 21% to RM13.4m in 4Q19 due weaker performance of its hotels during the Ramadan and Hari Raya period. The higher performance for the retail segment can be attributed to higher turnover rent at Sunway Pyramid, which is partially offset by lower contribution from Sunway Putra mall.

Sunway Pyramid and Sunway University and College expected to drive growth in FY20E. Looking ahead, we expect Sunway Pyramid, which contributed 58% to the portfolio’s NPI, to continue to drive EPU growth for Sunway REIT. This is supported by single-digit rental reversion based on its track record and well as tenant sales growth which have been healthy. The positive outlook is also supported by the addition of the newly acquired Sunway University and College, which will start full year contribution in FY20E. We also expect the office segment to improve further from FY19 as the REIT manager continues to improve occupancy rates for its assets. During the conference call, management has guide that it plans to allocate between RM15m and RM20m for the AEI of Sunway Tower to make way for a five-storey co-working space as well as to upgrade some common facilities at the asset. On the other hand, we expect the hotel segment to remain subdue because of overall cautious sentiment as well as competition from non-traditional accommodation services providers.

Maintain BUY with an unchanged TP of RM2.02. We make no changes to our FY20E/FY21F earnings estimates as the results are within expectation. Our Dividend Discount Model-based valuation (required rate of return of 7.4%; terminal growth rate of 2.0%) is maintained. We continue to like SUNREIT for its integrated asset cluster in a mature township and stable prospects from its crown jewel Sunway Pyramid Mall. Dividend yield is estimated at 5.1%.

Source: MIDF Research - 9 Aug 2019