Review

• Sunway REIT posted realised net profit of RM133.9mn in 1HFY17, registering a marginal contraction of 0.2% YoY. Results were within expectations, accounting for 51% and 49% ours and consensus’ full-year estimates respectively.

• A distribution per unit (DPU) of 2.28sen was declared for this quarter, bringing the YTD 1HFY17 DPU to 4.55sen (-3.0% YoY). This translates to an annualised distribution yield of 5.1%, based on yesterday’s closing price.

• YoY, Sunway REIT’s 1HFY17 revenue and net property income (NPI) inched up 1.1% and 1.7% to RM255.8 and RM190.1mn respectively. NPI growth was largely driven by commendable performance from the retail segment (+10.9% YoY), but partially offset by lower contribution from the hospitality segment (-27.5% YoY).

• In terms of segmental performance, the retail segment recorded strong NPI growth due to: 1) higher average rental for Sunway Pyramid and 2) additional rental income from Sunway Carnival following the completion of the new food and beverage area with NLA of approximately, 16,000 sq ft (3% of total NLA).

• The hospitality segment performance was lower largely due to the closure of Sunway Pyramid Hotel (formerly known as Sunway Pyramid Hotel East) for refurbishment since Apr-16. Meanwhile, the office segment performance is stabilising, with 2QFY17 NPI increasing by 7% QoQ and 6.2% YoY, largely due to improvement in occupancy rates.

Impact

• Maintained.

Conference Call Highlights

• Management believes that the outlook of the retail segment to remain challenging, in view of the oversupply of retail space and weak consumer sentiment. For 1HFY17, retail spaces which were due for renewal in both Sunway Pyramid and Sunway Carnival, were renewed at a single digit rental reversion. This is in line with management’s expectations, given the persistently challenging retail landscape that will pose pressure on prospects of healthy rental reversions.

• Recall, Pyramid Tower East Hotel has been closed for renovation since April-16. A total of 316 rooms were fully refurbished and has progressively re-opened for business as at 31 December 2016. It is targeted for reopening in 4QFY17 (2QCY17). The refurbishment will increase the hotel’s room inventory to 564 rooms from the current 549 and elevate the hotel from a superior to a deluxe category 4-star international hotel. We believe the refurbishment exercise is crucial in order to ensure that this hotel remains competitive.

• Office segment showed gradual improvement. Notably, Sunway Putra Tower’s occupancy rate improved from 25.7% in 1QFY17 to 31.2% for YTD 2Q FY2017. The improvement was attributable to commencement of a new tenant occupying 51,500 sq.ft. (16% of total NLA) in 2Q2017. In addition, it has secured another 12,000 sq.ft. (4% of total NLA) which will commence its tenancy in 3QFY17. This is expected to will improve the occupancy rate to approximately 42%.

• All in, management maintains its FY17 DPU guidance and expect a dip in DPU in FY17 compared to FY16. This is largely due to: i) closure of Pyramid Tower East Hotel, and ii) lower surplus cash as Sunway REIT will pay the entire amount of manager’s fee in cash in FY17, instead of 75%:25% in the form of cash and issuance of new units in FY16. In our earnings model, we expect FY17 DPU to fall by 3.4% YoY.

Valuation

• No change to our target price of RM1.79/unit, based on DDM valuation. Our target price implies forward yields of 5.0%, which is lower than the sector peers’ average forward yields of 5.5%. Maintain Sell.

Source: TA Research - 15 Feb 2017