Sunway REIT’s 3QFY20 core net profit of RM65.7m (-14.9% QoQ, -13.3% YoY) brought 9MFY20 sum to RM221.7m (+3% YoY); the results were within ours but below consensus’ expectations. Overall, the performance was affected by COVID-19 headwinds, coming from rental support granted to non-essentials retail tenants during MCO period and cancellation of booking and corporate event in their hotel segment. While Sunway REIT has to contend with the challenging retail and hotel business climate (due to COVID-19 and MCO), nonetheless at current levels, the stocks' yield remains appealing (5.6%) even after imputing negative repercussion from this crisis. We maintain our forecast; reiterate our BUY call with unchanged TP of RM1.74.

Within expectations. 3QFY20 core net profit of RM65.7m (-14.9% QoQ, -13.3% YoY) brought 9MFY20 core net profit to RM221.7m (+3% YoY). The results were within ours but below consensus expectations at 82% and 77% of full year forecast, respectively. We deemed this to be within expectation given likely weaker 4Q earnings ahead from a more profound MCO/CMCO impact. No dividend is declared as the income distribution payment frequency has been changed from quarterly to semi-annually effective 3QFY20 to sustain the trust through this challenging period.

QoQ. Revenue slipped down by 9.6% mainly due lower income contribution from the retail (-7.9%) and hotel segment (-32.2%), no thanks to COVID-19 impact. However, these were partially offset by the slight increase in office segment (+3.5%) and services segment (+2.3%). Net property expenses (NPI) was lower by 11.2%, which in turn dragged down net profit by 14.9%.

YoY. Top-line growth decreased by 7.1% due to lower performance from retail (- 11.2%) and hotel segment (-34.6%) resulted from COVID-19 impact coming from rental support granted to non-essentials retail tenants during MCO period and cancellation of booking and corporate event in their hotel segment. Office segment showed an improvement by 8.1% owing to improved showing from better occupancy rates (from 71% in 3QFY19 to 78% in 3QFY20). Furthermore, services segment was up by 98.9% due full income contribution of Sunway university & college campus as well as contribution from Sunway Medical Centre. NPI was lower by 9% in line with the lower revenue, bringing down core earnings to RM65.7m (-13.3%).

YTD. Top-line growth rose by 4.0%, attributable to contribution from the newly acquired Sunway University & college campus; however this was partially offset by lower performance from retail and hotel segments. Property operating expenses increased by 6.1% in line with rise in revenue, which in turn bumped up NPI by 3.3% and sequentially net profit by 3.0%.

Outlook. We believe Sunway REIT will be affected more profoundly in 4QFY20 due to prolonged rental supports for non-essentials retail tenants during the MCO period, lower sales turnover, as well as deteriorating occupancy rates for hotel segment. Although two of its hotels, Sunway Clio and Sunway Pyramid, has been gazetted as quarantine station (operating at 75% occupancy rate), the daily room rate was at a much lower rate. We believe such this move is necessary in the near term but occupancy could eventually deteriorate further once the number of quarantines decline. However, its office segment is relatively more insulated and stable in view that these office properties are located in established locations. Furthermore, their services segment and ‘industrial & others’ segment are expected to remain stable and continue to perform as usual despite the crisis as they are generally unaffected by the COVID-19 and MCO.

Forecast. Maintain as Result Were Inline.

Maintain BUY with an unchanged TP: RM1.74. Notably, our valuation is based on FY21 DPU on targeted yield of 5.4% which is derived from 2-years historical average yield spread of Sunway REIT and MAGY10YR. We continue to like Sunway REIT for its well-diversified portfolio in which the prominent assets are located at its unique township planning and strong backing from its sponsor. While Sunway REIT has to contend with the challenging retail and hotel business climate (due to COVID-19 and MCO), nonetheless at current levels, the stocks' yield remains appealing (5.6%) even after imputing negative repercussion from this crisis.

Source: Hong Leong Investment Bank Research - 20 May 2020