KEY INVESTMENT HIGHLIGHTS

• 3MFY21 earnings below expectations

• Higher sequential earnings driven by retail division

• Slow earnings recovery

• Challenging outlook

• Earnings estimates revised to reflect change in FYE

• Downgrade to Neutral from Buy with a revised TP of RM1.61

3MFY21 earnings below expectations. Sunway REIT 3MFY21 core net income of RM34.4m came in below expectations, making up 13% of both our and consensus full year estimates. The negative deviation could be attributed to weaker than expected earnings from retail and hotel divisions. Note that Sunway REIT has changed its financial year from 30 June to 31 December. Hence, FY21 shall consist of 18-month period from 1 July 2020 to 31 December 2021. Distribution per unit (DPU) of 0.9sen was announced for 3MFY21.

Higher sequential earnings driven by retail division. Sequentially, 3MFY20 earnings were higher at RM34.4m (+24%qoq) mainly driven by earnings recovery of retail division which recorded 37.4% increase in net property income (NPI). Note that retail division was dragged by rental assistance offered to tenants in 4QFY20 due to Movement Control Order (MCO) and Conditional Movement Control Order (CMCO). Meanwhile, NPI of hotel division shrank 78.3%qoq mainly due to weak hospitality industry and closure of Sunway Resort Hotel since July for refurbishment.

Slow earnings recovery. On yearly basis, 1QFY20 core net income was lower at RM34.4m (-56.4%yoy) as operations of core divisions were affected by Covid-19 pandemic. NPI of retail division was lower by 41%yoy due to rental support to assist tenants. Similarly, NPI of hotel division plunged by 94%yoy due to ongoing Covid-19 pandemic which hit tourism industry. On the other hand, office division recorded higher NPI (+10%yoy) due to improved performance of its office assets. Meanwhile, services segment recorded stable NPI (+3%yoy) due to positive rental reversion of Sunway Medical Centre and Sunway university & college campus.

Challenging outlook. We expect outlook for retail division to be challenging in the near-term due to resurgence of Covid-19 cases in Malaysia. Shopper traffic is expected to drop and hurt tenants sales. Meanwhile, outlook for hotel division remains weak as border of Malaysia remains closed. Besides, income of hotel division in FY21 is expected to be dragged by refurbishment of Sunway Resort Hotel.

Earnings forecast revised. We revise our earnings forecast for FY21 to RM397m from RM259m to reflect the change in financial year end to Dec 2021 which consists accounting period of 18 months. Meanwhile, we also factor in weaker contribution from retail division and hotel division in our FY21/22F earnings forecast. Besides, we include contribution from Sunway Pinnacle in our earnings forecast as the acquisition was completed on 20 November 2020. Meanwhile, earnings per unit (EPU) and DPU have been adjusted as total number of issue units in Sunway REITs units has been expanded to 3.42m post completion of private placement recently.

Downgrade to Neutral from Buy with a revised TP of RM1.61. Corresponding to the earnings revision, our TP for Sunway REIT is revised downward to RM1.61 from RM1.70, based on Dividend Discount Model. We like Sunway REIT’s diversify portfolio with recurring income from different segments, however, we see limited catalyst to Sunway REIT in near term. Earnings recovery of Sunway REIT is expected to be slow in view of the challenging outlook for its retail and hotel divisions. Hence, we downgrade our call on Sunway REIT to Neutral from Buy.

Source: MIDF Research - 24 Nov 2020