SUNREIT’s FY23 results met expectations with earnings driven by enhanced rental and lease incomes. The group remains positive on the outlook for its hotel and retail segments but less optimistic for the office segment. Ongoing refurbishments of existing key assets with strategic retail acquisition strive to keep its portfolio fresh and relevant. We maintain our OUTPERFORM call and raise our TP to RM1.72 (from RM1.63) as we roll over our valuation base to FY25F.

FY23 within expectations. SUNREIT’s FY23 core net profit of RM318.3m met our full-year forecast at 100%, but was below the consensus full-year estimates by 6%. The final distribution of 4.68 sen per unit led to a full-year payment of 9.3 sen, which exceeded our anticipated 8.8 sen.

YoY, FY23 revenue increased by 10%, primarily driven by the retail segment (+11%) which benefited from consistent retail sales and foot traffic across all its retail malls. The hotel segment (+38%) also saw an improved occupancy rate of 64% (FY22: 54%) with full room occupancy at Sunway Resort Hotel since July 2023. However, net property income margin saw some compression to 73.6% (-3.2ppt) on higher utilities cost. In addition to higher financing costs from a higher interest rate cycle, FY23 core net profit came in at RM318.3m (+5%).

QoQ, revenue increased by 8%, attributed to improved services (+49.5%) and retail (+11%) segments from year-end seasonal demand. Despite the growth, net property income experienced a 1% decrease due to the abovementioned increased operating costs. That said, net profit declined by 14%, a result of the full impact of the OPR hike since May 2022 and higher borrowings for capital expenditure. In summary, the core net profit showed an overall decline of 17%.

Outlook. With business operations already surpassing pre-pandemic levels, the earnings trend observed in FY23 is anticipated to stay steady in the upcoming quarters. We opine that forward earnings will continue to be supported by its hotel segment that has improved in 4QFY23. The occupancy rates are expected to keep improving in FY24, primarily driven by growth in domestic leisure, corporate, and MICE (Meetings, Incentives, Conferences, and Exhibitions) activities, along with a return to normalcy in international and domestic tourist arrivals.

Meanwhile, Sunway Pyramid’s ongoing space refurbishment of a former anchor tenant seeks to introduce more specialty-centric stores. The new and existing tenants could elevate rental yields going forward (with 62% of its NLA apparently being reserved so far). This is targeted to be completed by end of FY24. Additionally, the recent 163 Retail Mall acquisition could present several opportunities for the group in optimising its tenant trademix and potentially uplift its net yield of 6.5%.

Forecasts. Our FY24F earnings remain mostly unchanged. Meanwhile, we introduce our FY25F earnings.

Maintain OUTPERFORM with a higher TP of RM1.72 (from RM1.63). Against an unchanged target yield of 6.5% (derived from a 2.5% yield spread above our 10-year MGS assumption of 4.0%), we roll over our valuation base year to FY25F with its distribution per unit of 11.2 sen. The low yield spread reflects 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 of given a 3-star rating as appraised by us (see Page 4). SUNREIT is one of our sector Top Picks.

Source: Kenanga Research - 31 Jan 2024