• Maintain BUY, new DDM-derived MYR1.85 TP from MYR1.77, 12% upside with c.6% FY24F yield. Sunway REIT’s results were in line with our expectations, recording higher revenue growth attributed to Sunway Carnival Mall’s expansion and elevated occupancy rates for the hotel segment. We remain positive on the REIT’s outlook, as its acquisition strategy should drive earnings growth on top of the solid growth prospects from its diverse property portfolio.

• Results in line. 2Q24 core profit of MYR78m (-5% QoQ, +16% YoY) led to 1H24 core earnings of MYR160m (+0.8% YoY). The completed acquisitions of the six Sunway REIT Hypermarkets in April helped to offset the cessation of rental income from Sunway Medical Centre since it was disposed in Aug 2023. Net property income (NPI) margins also improved to 73.4% (1H23: 72.9%) with higher rental income recorded from the retail and hospitality segments. The REIT proposed a DPU of 4.66 sen (1H23: 4.62 sen).

• Portfolio rental reversions at 10%. Excluding the newly acquired hypermarkets, YoY retail segment growth was mainly led by Sunway Carnival Mall, which recorded 25% higher revenue YoY – this is as Phase 2 expansion has led to higher rental rates. Management shared that its tenant sales per sq ft equalled Sunway Pyramid’s for the first time in April, reflecting the results of the refurbishments. Sunway Pyramid recorded 1% lower revenue YoY due to the ongoing asset enhancement initiative or AEI, but should record higher rental rates once the reconfigured space (90% committed tenancies) is opened in November.

• Hotels benefitting from tourist arrivals. The segment’s revenue and NPI grew 7% and 8% in 1H24, mainly as Sunway Resort Hotel’s revenue more than doubled following the opening of its full room inventory since Jul 2023. Meanwhile, Sunway Hotel Seberang Jaya is seeing increased demand from corporate long-stay guests. Moving forward, with average room rates already at elevated levels, management thinks the segment’s growth would be more driven by higher occupancy rates (1H24: 62%, 1H23: 60%).

• Earnings forecast. We maintain our FY24F forecast, but increase our FY25F and FY26F earnings by 3% as we revise our rental rate assumptions. Our TP includes a 4% ESG premium based on our in-house methodology.

• Key risks: Lower-than-expected occupancy and rental reversions, and longer-than-expected delays in acquisitions.

Source: RHB Research - 16 Aug 2024