Sunway  REIT’s  1QFY14  net  profit  of  MYR55.4m  was  in  line  with estimates.  However,  amid  the  unexciting  outlook  for  the  office  and hospitality segments, management is guiding for flat or negative growth in  its  FY14 DPU. We  are cutting  our FY14-15 earnings  by a  marginal  2-6% to factor in the negative impact. Maintain NEUTRAL,  with a  revised FV of MYR1.49 (from MYR1.52).

• Within  expectations.  Sunway  REIT’s  (SREIT)  1QFY14  net  profit  of MYR55.4m  (+6.5%  y-o-y)  was  in  line  with  estimates.  Revenue  growth remained  flat  owing  to  the  absence  of  income  due  to  Sunway  Putra Mall’s  (SPM)  closure  and  lower  contribution  from  the  office  and ospitality segments. Although total distributable income rose 6.7% y-o-y to MYR58.4m in 1QFY14 (1QFY13: MYR54.8m),  the  DPU for 1QFY14 dipped slightly to 2.00 sen (1QFY13: 2.03 sen) due to its enlarged base.
• Weaker  DPU  growth  in FY14.  At the briefing, management  guided for flat or negative growth  its  FY14 DPU.  The occupancy rates at SREIT’s hotels  continue  to  be  affected  by  the  decline  in  corporate  business, which represents the  bulk of their  income, while the occupancy of  its  KL offices  is  currently  below 90%.  There is still downside  risk  for offices  as more  than  60%  of  net  lettable  area  (NLA)  will  be  due  for  renewal  in FY14-15. That said,  growth in the retail segment could still  help to offset the decline from these segments. Meanwhile, the refurbishment of Oasis Boulevard 5  in Sunway Pyramid  is on track  for  completion in 2QFY14. SPM’s renovation is also on track  for completion in  Feb 2015. SPM  is designed to be an ‘anchorless’ mall, although there will be several minianchors  taking  up  about  20-25k  sqf  of  NLA  each.  The  total  capex  for FY14-15 will be about MYR500m, of which MYR220m  will  be utilised in FY14.  With regard to the  GST, the impact is still uncertain for now  but management  is  of  the  view  that  the  tax  is  likely  be  incorporated  into rental  rates  although  tenants  will  be  able  to  claim  GST  as  input  tax credit.
• Still  NEUTRAL.  We  cut  our  FY14-15  earnings  marginally  by  2-6%  to account for  the softer growth in the office and hotel segments . Maintain NEUTRAL, with a revised FV of MYR1.49 (from MYR1.52).

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Company Profile
Sunway REIT is a large-cap diversified MREIT with exposure in the retail, commercial, hospitality and healthcare segments.

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Source: RHB