• Stay NEUTRAL and MYR1.46 TP, 4% downside. 1H22 results were in line with our expectations, with Sunway REIT recording strong quarterly results attributed to pent-up demand and the festive season, while the office and services segments remained stable. We expect the recovery pace to continue in 2H22, boosted by contribution from Sunway Carnival Mall’s new wing. The hospitality segment is expected to improve as tourists slowly return following the opening of international borders.

• 1H22 earnings in line with expectations. 2Q22 core earnings of MYR69.5m (-16% QoQ, +107% YoY) led to 1H22 core net profit of MYR152.7m (+133% YoY), accounting for 51% of our and consensus’ full- year estimates. Revenue for the period rose 43% YoY due to better performance across all segments. On a QoQ basis, revenue and earnings dropped 6% and 16% due to the top-up of guaranteed income for Sunway Clio Property and Sunway Hotel Georgetown upon the lease anniversary in 1Q22. A 4.2 sen DPU was declared for the quarter.

• Retail still going strong. Revenue for the retail segment jumped 78% YoY backed by a stable average occupancy rate at 94% (1Q22: 97%). The strong performance was attributed to the marginal rental support, pent-up demand, and Aidil Fitri festivities. The new wing of Sunway Carnival Mall also opened on 24 Jun 2022, and after the 1-month rent-free period, it would begin to contribute to the REIT’s income. The mall has a current occupancy of 80%, with a committed occupancy of 90% by year-end. Management guided that the reversion will be in the low-single digit positive range.

• Office and services segments remain stable. The office and services segments recorded an increase in revenue by 2% and 3%, with the office occupancy remaining at 84%. The increase in services revenue was due to the annual rental reversion for Sunway Medical Centre and Sunway’s university and college campus in accordance with their master lease agreements.

• Hospitality segment to gradually recover. Sunway Resort, which had undergone major refurbishment since Jul 2020 to modernise its offerings, has been reopening progressively since May 2022, with a higher average room rate. With the segmental revenue and NPI at only 60% of pre- pandemic numbers, we believe the segment will gradually recover as international tourists slowly return. Meanwhile, domestic leisure remains the key driver, as well as an increase in business events.

• Maintain NEUTRAL. We make no changes to our estimates as results are in line. Our TP incorporates an 8% ESG premium based on its ESG score of 3.4, which is well above the country median. Key risks are weaker/stronger-than-expected consumer sentiment, and weaker/stronger- than-expected occupancy rates and rental reversion.

Source: RHB Research - 19 Aug 2022