2QFY16 results were within expectations. Maintain NEUTRAL, with a TPof MYR1.61 (from MYR1.64, 9% upside), given the temporary closure of Pyramid Tower East for upcoming refurbishment works and theresulting impact on earnings. While the outlook for all segments (retail, office and hospitality) remains challenging, we think the continued turnaround of Sunway Putra Mall may help to offset the downside risk.

• Within expectations. Sunway REIT’s (SunREIT) reported 2QFY16 (Jun) core profit came in within our and market expectations. Revenue growth came mainly from the improved contribution from Sunway Putra Mall (+291% QoQ), which was more than enough to offset the drop in rental from Sunway Tower (-58% QoQ), as the office tower’s occupancy rate fell to 21% from 67% in FY15. The performance of most other property assets was decent with a <4% QoQ growth, while its hotel segment saw a seasonal boost due to the year-end holiday period. A distribution per unit (DPU) of 2.57 sen was declared.
• Briefing highlights. Sunway Putra Mall’s occupancy rate rose slightly to 84.9% (from 83.9% in end-Sep 2015), and its net property income (NPI) finally turned into black during the quarter. In order to stay competitive, Pyramid Tower East will undergo a 12-month refurbishment exercise that will cost MYR100m-120m – with a gradual closure in 3QFY16 and full closure by 4QFY16. Aggressive marketing efforts have also been undertaken to accelerate the turnaround of Sunway Putra Hotel. Meanwhile, management expects a lower rental reversion for new renewals, given the influx of new retail malls and challenging economic conditions. Overall, its near-term portfolio lease expiry profile is stable,as the next major renewal (51.5% of net lettable area, or NLA) wouldtake place only after FY18.
• Forecasts and risks. We cut our FY16F-18F earnings by <2% per year in view of the temporary closure of Pyramid Tower East. Key risks to our earnings forecasts include: i) prolonged weak consumer sentiment, andii) low occupancy rates for its hospitality and office assets.
• Maintain NEUTRAL. We retain our NEUTRAL call with a revised DDMbased TP of MYR1.61 (from MYR1.64). Despite the current headwinds in both the office and hospitality segments, we think that the REIT’s retail assets should help mitigate lower contributions from both segments. Furthermore, with 6.4-6.7% FY16F-17F dividend yield, we think that defensive investors should maintain their exposure in the REIT.