1QFY16 earnings met expectations. Maintain NEUTRAL and DDM-based TP of MYR1.64 (9% upside). SunREIT remains cautious on the shortterm prospects of its hospitality and office segments due to softer demand and lower occupancy rates. That said, we expect this to be offset by strong growth in the retail segment, underpinned by the recently-opened Sunway Putra Mall as well as Sunway Pyramid.

Within expectations. Sunway REIT’s (SunREIT) reported 1QFY16(Jun) core profit of MYR64.5m (+13.8% QoQ, +1.7% YoY). This came in line at 24%/23% of our/consensus full-year forecasts respectively. 1Q earnings were mainly underpinned by healthy rental revenue from both retail and hospitality segments. However, this was offset by lower contributions from the office segment, which was hit by low occupancy. A DPU of 2.12 sen was declared, down 7% YoY, due to lower realised profit and a reduction of manager fees in units to 25% (from 50%).

Briefing highlights. Management shared that the committed occupancy rate for Sunway Putra Mall has increased slightly to 83.9% (from 82%) as of end-September. During the quarter, a large mini-anchor, TanjungGolden Village Cinemas (TGV), has finally commenced operations. As mentioned in our 17 Aug report Sunway REIT: Unveiling Sunway Putra Mall, the cinema is a revolutionary beanieplex and is expected to drive more shopper traffic to the mall. Additionally, two more mini-anchors ieH&M and Monki started operations at the mall on 29 Oct. With these new openings, the REIT is confident that the physical occupancy would be close to the committed occupancy level by end-2015. However, management reiterated its short-term cautious view as it expectsconsumer sentiment to remain weak, while its office and hospitality segments to continue facing headwinds due to low occupancy rates.

Forecasts and risks unchanged. Key risks to our earnings forecasts include: i) low occupancy rates, and ii) delay in the remaining refurbishment of Sunway Putra Hotel.

Maintain NEUTRAL. We retain our NEUTRAL call and DDM-based TP of MYR1.64. Despite current headwinds facing both office and hospitality segments, we think that the REIT’s retail assets should help mitigate lower contributions from both segments . Furthermore, with FY16F-17Fdividend yields of 6.5-6.8%, we think that investors should maintain their exposure to the REIT.