• Maintain BUY, MYR1.74 TP (Ke: 7.8%), 12% upside and c.7% FY24F yield. Sunway REIT’s 9M23 results were in line with expectations, as the strong recovery in the hotel segment offset the increase in interest and utility costs. On a portfolio basis, management guided that rental reversion reached double digits, partly attributed to the lower base during the pandemic. We like Sunway REIT for its diverse property portfolio, which should drive earnings growth, and its longer-term acquisitions target.

• Results in line. 3Q23 core net profit of MYR86.9m (+29.4% QoQ, flat YoY) led to a 9M23 core earnings of MYR245.6m (+2.6% YoY). This is in line with expectations at 74%/73% of ours and Street’s estimates. The 9M23 13% revenue growth YoY was driven by recovery in the hotel segment and positive rental reversions in the retail segment. However, this was mostly offset by 21% higher operating expense (mainly utility costs) and 43.9% higher interest expense (average borrowing cost: 3.76%). The REIT recorded a 9M23 DPU of 7.17 sen (9M22: 7 sen).

• Hotel segment’s 3Q23 revenue (+51% YoY) was boosted by a full inventory of 460 rooms at Sunway Resort Hotel from Jul 2023 onwards following the hotel’s phased reopening. The segment’s YTD average occupancy rate improved to 63% (9M22: 54%), which in tandem resulted in an increase in average room rate. While we continue to expect occupancy rate to further improve in the coming years as the tourism sector recovers (2019: 69%, 2018: 74%), the already elevated room rates should be maintained at current levels.

• Retail. In 3Q23, retail revenue improved 1% YoY, boosted by the strong performance of Sunway Carnival Mall’s new wing and positive rental reversion for SunCity Ipoh Hypermarket’s anchor tenant. For Sunway Pyramid, the REIT has secured tenants for c.68% of the space previously occupied by AEON (11% of the mall’s NLA) as it continues the reconfiguration exercise, which is expected to be completed in 4Q24.

• Hypermarkets acquisition still ongoing. Revenue and NPI for the services segment dropped 13% YoY in the quarter following the disposal of Sunway Medical Centre at end-Aug. The proceeds are reserved for the proposed acquisition of six hypermarkets – still pending regulatory approvals. Management hopes the acquisition would be finalised soon and rental contributions can begin by Jan 2024.

• Earnings forecast. We make minor adjustments to our earnings forecast and keep our MYR1.74 TP. Our TP incorporates a 4% ESG premium based on our in-house methodology. Key risks: Lower-than-expected occupancy and rental reversion, longer-than-expected delays in acquisitions, and higher-than-expected costs.

Source: RHB Securities Research - 17 Nov 2023