SREIT’s FY13 earnings were boosted by proactive capital management and  contributions  from  new  assets.  Going  forward,  it  is  likely  to  focus on organic growth and allocate MYR500m as refurbishment capex over the  next  two  to  three  years.  That  said,  despite  the  robust  growth prospects, the rise in bond yields is likely to pressure sector valuations. Maintain NEUTRAL. 
 
- Strong results overall. Sunway REIT (SREIT)’s 4QFY13 core net profit of  MYR55.5m  (+15.4%  y-o-y; flat  q-o-q)  brought  its  total FY13  earnings to  MYR218.8m  (+14.8%  y-o-y).  Earnings  were  boosted  by  the  strong performance  of  its  retail  assets,  new  contribution  from  Sunway  Medical Centre  (acquired  in  Dec  2012)  as  well  as  the  interest  savings  arising from the REIT’s active capital management initiatives. This softened the impact  of  Sunway  Putra  Mall  (SPM)’s  closure  from  April  2013  onwards as  well  as  the  lower  contributions  from  the  office  and  hospitality segments.  SREIT  recorded  an  average  portfolio  rental  rate  growth  of 18.7%  (over  a  three-year  period)  for  the  717k  sq  ft  of  net  lettable  area (NLA) renewed. The total distribution per unit (DPU) for FY13 is 8.3 sen (+10.7%  y-o-y),  translating  into  a  decent  net  yield  of  5.6%  as  of yesterday’s closing price.

- Briefing  highlights.  Management  has  guided  for  capex  totaling MYR500m for asset refurbishments over the next two to three years. The bulk  of  this  will  be  spent  on  the  major  overhaul  of  Sunway  Putra  Place (SPM,  Sunway  Putra  Tower  and  Sunway  Putra  Hotel),  due  for completion  in  FY15.  Despite  SPM’s  closure  during  the  construction period, SREIT is confident that the growth in its other assets will help to sustain DPU growth. In the current refurbishment of Oasis Boulevard 5 in Sunway  Pyramid,  SREIT  is  creating  20k  sq  ft  of  new  NLA  and reconfiguring 23k sq ft of the existing NLA. The indicative ROI for these exercises  are  in  the  high  single  digits.  The  REIT  is  also  managing  its capital prudently, with 80% of its debt now on fixed rates (3QFY13: 56%) to hedge itself against the rising bond yield environment.

- Still  NEUTRAL.  We  introduce  our  FY15  numbers  as  we  roll  over  our financial  period.  Maintain  NEUTRAL  call  and  MYR1.52  FV  on  the counter.  Note  that  rising  bond  yields  will  continue  to  exert  downward pressure on valuations in the REIT sector.

Source: RHB