Sunway REIT’s 1QFY15  (Jun)  net profit came in line at 26%/25% of ourand consensus estimates.  Net profit grew 14.5% YoY, driven by strong rental  revenue  growth  post-refurbishments  and  some  expenseswritebacks. We believe that the much-anticipated reopening of Sunway Putra Mall in 4QFY15 will help to offset the soft office segment. Maintain NEUTRAL and DDM-based TP of MYR1.42 (6.1% downside).

In  line.  Sunway  REIT’s  (SunREIT)  1QFY15  net  profit  of  MYR63.4m(+14.5%  YoY,  +13.1%  QoQ)  came  in  line  at  26%/25%  of  our  and consensus  full-year  estimates.  The double-digit growth in net profit wasattributable  to:  i)  increased  rental  contribution  from  its  retail  and hospitality  segments  due  to  the  kicking  in  of  positive  rental  reversions and higher  overall occupancy  post-refurbishments, and ii)  writebacks  of MYR1.5m for the overprovision of the assessment expenses for its Kuala Lumpur-based assets. A DPU of 2.28 sen was announced, up 14% YoY.

Briefing  highlights. We expect the retail segment to remain SunREIT’s main growth driver. The refurbishment of Sunway Putra Mall is now 88% completed, and is expected to reopen in 4QFY15 (a slight delay from its initial  3QFY15  target).  About  70%  of  the  space  has  been  leased  out, including  a  cinema  operator,  a  supermarket,  and  food  and  beverage (F&B)  outlets.  Occupancy  for  its  other  retail  assets  remains  healthy  at 98-100%.  We expect the hospitality segment to register healthy growth this year  as most assets have just completed refurbishment works, and thus  have  been  recording  higher  occupancy  rates.  The  outlook  for  the office  segment  remains  bleak,  with  occupancy  rates  at  Sunway  Tower and Sunway Putra Tower expected to drop to 50% and 30% respectivelywhen  their  anchor  tenants  move  out  in  December.  Nonetheless,  we believe  the growth in the other two segments will  likely  mitigate the loss of income from the office segment.

Earnings  forecasts.  We  make  no  changes  to  our  FY15-16  earnings forecasts  for now.  We  also take  this opportunity to introduce our FY17 figures.

Maintain NEUTRAL. We maintain our  DDM-based TP at MYR1.42. We believe that the REIT is fairly valued at current prices, as investors have largely  priced  in  the  positives  from  Sunway  Putra  Place’s  revamp.  We reiterate that SunREIT’s potential re-rating catalyst will be the injection of yield-accretive assets.

Source: RHB