KEY INVESTMENT HIGHLIGHTS

• Virtual meeting with Sunway REIT

• Unexciting outlook for retail division

• Hotel division remains weak

• Office and other divisions are stable

• Earnings estimates unchanged

• Maintain Neutral with an unchanged TP of RM1.61

Virtual meeting with Sunway REIT. We had a virtual meeting with Sunway REIT and came away feeling neutral on outlook for Sunway REIT due to mixed prospect for its business divisions. Key takeaways from the meeting as below:

Unexciting outlook for retail division. Outlook for retail division is muted due to Covid-19 pandemic. We gather that footfall at its shopping malls which initially recovered to 70-80% pre-Covid level during RMCO period has declined to 50-60% pre-Covid level after the re-imposition of CMCO in Klang Valley. Meanwhile, rental reversion was flattish due to the challenging outlook and management expects rental reversion to remain flattish in the near-term. Besides, we think that Sunway REIT may incur higher quantum of rental assistance to tenants in the near-term due to the lower footfall at shopping malls. Hence, we see that earnings of Sunway REIT will be partly dragged by higher rental assistance and flattish rental reversion.

Hotel division remains weak. Hotel division is expected to remain weak in the near-term as borders of Malaysia remain closed. Besides, the closure of Sunway Resort Hotel for refurbishment is expected to drag earnings of hotel division in FY21. Refurbishment of Sunway Resort Hotel which cost about RM230m-RM260m is expected to complete by stages in 2021. We gather that about 200 rooms will be reopened in March 2021 and the remaining 200+ rooms will be reopened in July 2021. We remain cautious on outlook for hotel division as we only expect earnings recovery after the pandemic is over.

Office and other divisions are stable. Performance of office division was stable in 3MFY21 by recording 10% increase in net property income. Looking ahead, office division is expected to remain stable in the nearterm as rental reversion is expected to be flattish. Meanwhile, earnings from services segment is expected to remain encouraging as rental reversion of Sunway Medical Centre and Sunway university & college campus will remain in positive territory due to fixed annual rental reversion. On the other hand, Sunway REIT is looking to expand its portfolio mainly in services and industrial segment via asset acquisition or M&A to achieve its target asset size of RM13b-15b by 2025. Note that asset value of Sunway REIT stood at RM8b in 3MFY21.

Maintain Neutral with an unchanged TP of RM1.61. Post meeting, we make no changes to our earnings forecast. We also maintain our TP for Sunway REIT at RM1.61, based on Dividend Discount Model. While 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 outlook for Sunway REIT is expected to be dragged by the weak performance of hotel division and weaker earnings from retail division. Hence, we maintain our Neutral call on Sunway REIT.

Source: MIDF Research - 21 Dec 2020