Investment Highlights

• We maintain our BUY recommendation on Sunway REIT (SREIT) with an unchanged fair value of RM1.82 based on a target yield of 5.0% over FY21F distributable income. We cut our FY20 distributable income by 7.8% while our FY21F–22F numbers remain unchanged.

• SREIT’s 9MFY20 distributable income of RM206.5mil (-4.3% YoY) came in within expectation despite making up 81% of our full-year estimates as we expect weaker income in the next quarter due to the impact of movement control order (MCO). 9MFY20 revenue grew by 4.0% YoY to RM451.9mil mainly attributable to the contribution from the newly acquired Sunway University & College campus. Debt-to-total assets ratio is steady at 37% and still below the regulatory threshold of 50%.

• Net property income (NPI) rose by 3.3% to RM339.2mil, in line with revenue growth while distributable income to unit holders decline by 4.3% to RM206.5mil after deducting distribution to perpetual holders amounting to RM15mil.

• The retail segment reported its 9MFY20 revenue of RM310.6mil (- 3% YoY) while the segment’s NPI fell by 7% YoY to RM216.4mil mainly due to the impact of the MCO. SREIT has given a 14-day free rental during the first phase of the MCO to all non-essential services’ tenants. Occupancy rates at Sunway Pyramid, Carnival and Putra Mall remained stable at 97.6%, 96.5% and 92.4% respectively (vs. 98.5%, 97.9% and 90.8% YoY). Meanwhile Sunway Clio Retail’s occupancy rate has fallen to 64.8% from, 93.1% due to due to termination of a non-performing tenant in April 2019.

• The hotel sector’s 9MFY20 revenue and NPI slid by 3% and 2% to RM61.5mil and RM56.6mil respectively due to the abovementioned reasons. However, revenue for the hotel segment will be partially mitigated by the minimum guaranteed rental as stipulated in the Hotel Master Lease (HML) for FY20.

• The office sector’s revenue and NPI expanded by 10% and 13% to RM31.3mil and RM17.6mil respectively on the back of the improved performance from all office properties. Revenue and NPI for the services segment surged 152% YoY to RM44.0mil, backed by new income contribution from the Sunway University & College campus and Sunway Medical Centre.

• Management guided for lower earnings for FY20 due to the impact of the MCO while the ongoing Covid19 pandemic will result in lower tourism activities and smaller shopping crowd. We cut our FY20 distributable income by 7.8% while our FY21F–22F numbers remain unchanged.

• To recap, we have cut our FY20–FY21 distributable income forecasts by 17% and 18% respectively in our previous sector reports dated 19 March, 9 and 30 April 2020 to reflect the impact of the MCO and its spillover effects to the. Nonetheless, we like SREIT for its management’s reputation, strong brand name and market position in the shopping complex segmentwhich has posted an average occupancy rate of more than 90% over the past 3 years. Maintain BUY.

Source: AmInvest Research - 20 May 2020