KEY INVESTMENT HIGHLIGHTS

• 1QFY20 earnings were within expectations

• CNI for the first three months improved by 1.0%yoy to RM73.7m

• Expect retail segment to improve in the coming quarters

• Maintain BUY with an unchanged TP of RM2.02

1QFY20 earnings were within expectations making up 24% of ours and consensus’ estimates. A DPU of 2.50 sen was announced, which is also within with our expectation.

CNI for the first three months improved by 1.0%yoy to RM73.7m as revenue jumped 8.1%yoy to RM155.4m. This was mainly due to the new income contribution from Sunway University and College. Meanwhile the growth in CNI was slower than the increase in revenue mainly due to RM5.0m that is attributable to its perpetual note holders. Sequentially, CNI rose 3%qoq while revenue was up by 7% compared the preceding quarter.

Overall, its portfolio net property income (NPI) rose 7.7% to RM119.1m driven by the hotel segment (+7.0%yoy to RM22.0m), office segment (+11%yoy to RM5.7m), services (+152%yoy to RM14.5m) as well as industrial and others (+10%yoy to RM1.5m). The jump in the services segment can be attributed to the full income contribution from Sunway University and College as well as Sunway Medical Centre for the positive rental reversion in accordance with the master lease agreement. Meanwhile, improvement at the hotel was due to the reopening of ballroom and function rooms at Sunway Resort Hotel and Spa following the refurbishment while its office properties saw better occupancy rates. However, retail segment NPI fell by 3%yoy to RM75.3m mainly due to higher on-year advertising and promotional expenses (A&P) at Sunway Pyramid.

Expect retail segment to improve in the coming quarters. Despite the subdued performance of its retail segment this quarter, mainly due to higher year-on-year A&P expenses at Sunway Pyramid and lower occupancy rate (49.6% in 1QFY20 vs 90.3% in 1QFY19) at Sunway Clio due to termination of a non-performing tenant in April 2019. A replacement tenant has been secured to commence by 2QFY20. At Sunway Pyramid, occupancy rate registered at 97.3% vs 98.2% in 1QFY19 due to fit-out period for new tenants. A total of 29.2% of total space due for renewal in FY20 has been renewed at a single-digit rental reversionary rate, which should also contribute positively to the retail segment NPI in the coming quarters. There is another 33.8% of NLA up for renewal at Sunway Pyramid in FY20. This may be slightly offset by the negative rental reversion at Sunway Clio retail and Sunway Carnival, of which the latter is mainly due to the reconfiguration in the midst of its expansion plan.

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 5.2%.

Source: MIDF Research - 6 Nov 2019