SUNREIT's 9MFY24 results met expectations. Its core net profit grew by a marginal 1% YoY as new income streams were largely offset by higher borrowings. The spaces surrendered by AEON in Pyramid mall have now been refurbished and fully occupied by 110 new tenants at rental rates more than double the rates previously charged on the former. We raised our FY24F/FY25F earnings by 5%/15% led by income catalysts in its retail portfolio, uplift TP from RM1.81 to RM2.01 (+11%), and reiterate our OUTPERFORM call.

Within expectations. SUNREIT's 9MFY24 core net profit came in at RM249m, making up 70% of our full-year forecast and the full-year consensus estimate with a stronger 4Q ahead. No dividend was announced in the quarter.

YoY, revenue increased by 3%, largely driven by the inclusion of rental income of six new hypermarkets since April 2024 and stronger performance from Sunway Carnival post refurbishments. This was slightly offset by the absence of Sunway Medical Centre's Tower A and B (disposed in Aug 2023). Net profit grew by a slower pace at 1%, partially weighed down by higher borrowings.

QoQ, revenue grew by 9%, mainly from the abovementioned reasons with net profit surging by 14% as expenses only saw a moderate increase due to fewer festive season expenses.

Doubling of rental rates. Following the departure of previous anchor tenant, AEON, the spaces in Sunway Pyramid (now named as "Oasis") has been filled by a whopping 110 new tenants and have opened on 1st November. Noteworthy, the area has been refurbished and transformed into a lively and vibrant shopping space that can attract higher foot traffic.

While the affected NLA has decreased (from 320k sq ft. to 260k sq ft.), this allows the group to more than double up the rental rate it used to charge the previous anchor tenant, which accounts for 11% of Sunway Pyramid total NLA. In addition, the progressive refurbishment works in Sunway Carnival that will be completed in mid FY25 will bring in even more offerings in the mall in Seberang Jaya and further boost SUNREIT's earnings. We are confident that its hotel segment will continue to see occupancy growth following government's higher budget allocation to tourism expenditure. Downside remains to be the upcoming subsidy rationalisation in FY25.

Forecasts. Following latest progresses and model updates, we raised our FY24 and FY25 earnings by 5% and 15%, respectively. This is mainly driven by better performances ahead in SUNREIT's retail portfolio which we have turned more positive following our on-the-ground visits.

Valuations. Raised TP from RM1.81 to RM2.01 following our adjustments above while maintaining our OUTPERFORM call. The basis of our TP remains unchanged at a target yield of 5.25% (derived from a 1.5% yield spread above our 10-year MGS assumption of 3.75%), The relatively lower yield spread against what we applied to its peers is to reflect SUNWAY's diversified asset portfolio in key urban regions. We reckon that the group's brand equity also benefits greatly from its affiliation to the Sunway conglomerate. There is no adjustment to our TP based on ESG given a 3- star rating as appraised by us (see Page 4).

Source: Kenanga Research - 15 Nov 2024