• Stay NEUTRAL with new MYR1.46 TP from MYR1.45, 1% downside and c.6% FY22F yield. 1Q22 results exceeded our and Street’s expectations, with the strong performance mainly underpinned by pent-up demand, the festive season, and marginal rental support provided during the quarter under review. While the reopening of international borders will be a boost to the hotel segment, in our view, the recovery will likely be gradual – we expect flattish reversion rates in FY22 against oversupply glut backdrop.

• 1Q22 earnings of MYR83.1m exceeded our and Street’s expectations at 29-31% of full-year estimates. On a YoY basis, revenue grew 47.7% from lower rental support granted to tenants during this quarter, as well as from pent-up demand and the festive season boosting the retail segment. Revenue also increased from the predetermined rental reversions for Sunway Medical Centre and Sunway University (+3%). In tandem with the revenue growth, earnings grew 160.7% YoY.

• Retail and office outlook. Average occupancy rates for the retail and office segments remained stable during the quarter at 97% and 84%, unchanged from Dec 2021. With the strong 1Q22 results recorded, management is hopeful that the REIT can avoid negative reversion rates for this year, as well as guiding that rental rebates will be marginal moving forward. Revenue from the office segment increased 1% YoY, supported by the commencement of new tenants at Pinnacle Sunway. Management also guided that Sunway Carnival Mall should be opening in 2Q22 with a committed occupancy take-up rate of >90%.

• Hotel recovery to be gradual. We believe the reopening of international borders will be much needed boost for the hotel segment, with the Malaysian Association of Hotels or MAH expecting the industry average occupancy rate to hover between 30% and 40% in the short term (1Q22 occupancy: 42% vs 6QFY21: 32%). Domestic leisure remains the key driver for the segment, as international and business travel are likely to only gradually pick up. The Sunway Resort Hotel & Spa was reopened in May after undergoing refurbishments since Jul 2020.

• Expansion plans. Sunway REIT acquired an investment property at Port Klang, which is planned for redevelopment into a seafront tourist destination. Additionally, the REIT intends to expand its asset allocation into the services and industrial segments to between 20% and 30% of property value.

• Maintain NEUTRAL. We raise our FY22F-23F earnings by 5-3% with a new TP of MYR1.46. We ascribe an 8% ESG premium to our TP based on Sunway REIT’s ESG score of 3.4, which is well above the country median.

Source: RHB Research - 19 May 2022