Review

• Sunway REIT’s 9M23 realised net profit attributable to unitholders of RM245.6mn (+3% YoY) came within expectations, accounting for 70% and 73% of ours and consensus’ full-year estimates, respectively.

• 9M23 distributable income per unit stood at 7.2 sen, this works out to a 6.2% annualised dividend yield.

• Sunway REIT’s 9M23 net property income (NPI) increased by 11% YoY to RM391.2mn, driven by a 13% growth in revenue. The improved performance was largely attributable to the strong upsurge in hotel segment performance as well as resilient growth in the retail segment.

• The retail segment's NPI grew 9% YoY to RM241.2mn in 9M23. This growth stemmed from improved retail sales and footfall, amplified by the stronger performance of Sunway Carnival Mall compared to the same period last year, largely attributed to the opening of a new wing in June 2022.

• The hotel segment's NPI surged by 52% YoY to RM60.9mn in 9M23, driven by an increase in the average occupancy rate from 54% to 63%. This growth was fuelled by a robust uptick in domestic travellers during festive seasons and school holidays, a recovery in international travel, and increased demand for MICE activities.

• The office segment sustained stable performance in 9M23, while the service segment saw a slight 3.5% YoY decline in NPI, primarily attributable to the discontinuation of rental income from Sunway Medical Centre (Tower A & B) following the completion of its disposal on 30 August 2023.

• The NPI of the industrial and other segments witnessed a 19% YoY decline, mainly attributed to operating expenses associated with the currently vacant Sunway REIT Industrial – Petaling Jaya 1. Management anticipates an improvement in the segment's performance next year, as a tenant, set to occupy 22% of the spaces, is confirmed to commence operation in December. Simultaneously, negotiations with two potential tenants are actively underway to fill the remaining areas.

• 3Q23’s realised profit attributable to unitholders jumped 29% QoQ to RM86.9mn, primarily propelled by enhanced performance in the retail segment. Furthermore, the hotel segment, especially Sunway Resort Hotel, significantly contributed to the revenue increase following refurbishments and the full room inventory available since July 2023.

Impact

• Maintain earnings forecasts.

Conference Call Highlights

• The management is cautiously optimistic about the retail segment, highlighting consistent improvements in footfall and tenant sales. YTD rental reversion has touched double digits, largely attributed to the low base effect of lease adjustments during the pandemic, indicating a return to pre-pandemic rental rates. Management anticipates a midsingle digit rental reversion in the retail segment for FY24.

• The office, industrial, and other segments are expected to maintain a stable performance. Management holds a positive outlook for the hotel segment, anticipating ongoing occupancy growth in 2023 driven by domestic leisure, corporate, and MICE activities. Management envisions momentum gaining traction in the 4Q23 and 2024.

Valuation

• No change to our TP of RM1.75/unit, which is based on a target yield of 6.0% to our CY24 DPU projection of 10.5sen/unit. Maintain Buy.

Source: TA Research - 17 Nov 2023