Rental Assistance Still Weighs on Earnings

• Sunway REIT (SREIT)’s 1Q21 realised net profit fell by 60% yoy to RM29m while DPU declined by 64% to 0.90 sen on weakness in its hotel and retail segments.
• 1Q21 results were below expectations – making up 11% of street and our expectations.
•  In view of a slower recovery in retail and hotel segment from implementation of CMCO, we cut our FY21E expectations but adjust it to reflect a revised 18 months financial year end while raising our FY22/23E earnings by 2.9%/2.4%. Maintain HOLD with a higher target price of RM1.66.

1QFY21 Realised Net Profit Rebounded by 34% Qoq to RM29m

SREIT’s 1QFY21 realised net profit rebounded by 34% qoq to RM29.4m, driven by a recovery in the retail revenue (+44% qoq), partly offset by higher provisions for doubtful debts (RM10m in 1Q21). Elsewhere, the revenue contribution from office, industrial and service segments were flat qoq while the hotel business continued to weaken (revenue slipped by 60% qoq to RM2.8m). Overall the results were below market and our expectations – 1Q21 realised net profit came in at 11% of street and of our prior full year earnings forecasts. The variation was largely due to lower than expected hotel revenue and higher than expected provisions for doubtful debts.

Realised Net Profit Fell by 60% Yoy From the Pre-Covid 1QFY20

Compared to 1QFY20, the pre-Covid-19 period, SREIT’s 1QFY21 realised net profit fell by 60% yoy due to a dip in retail (-26% yoy) and hotel revenue (-88% yoy). SREIT continues to provide rental assistances to some retail tenants and this has weighed on their retail revenue. Meanwhile, the hospitality segment remains highly challenging and the expiries of several long-term master lease contracts (since renewed with lower minimum guarantee rental) has resulted in a sharp decline in hotel revenue.

Maintain HOLD With a Higher TP of RM1.66

As SREIT has changed its financial year end from June to December, we have revised our FY21E forecast from 12M to 18M, by incorporating lower underlying earnings forecasts for 4QCY20/1QCY21 due to the reimplementation of CMCO. Nonetheless, we have raised our FY22-23E EPU forecasts by 2.9%/2.4% as we turn slightly more optimistic on retail and hotel earnings following the positive progress on Covid-19 vaccine development. Maintain HOLD with a higher DDM-based price target of RM1.66 (from RM1.65). Upside/downside risks: (i) faster-/slower-than-expected economic recovery; (ii) lower/higher interest rates; (ii) stronger-/weaker-than-expected earnings due to lower visitorship to its hotels.

Source: Affin Hwang Research - 24 Nov 2020