SUNREIT’s 1QFY24 results met expectations. Its 1QFY24 core net profit declined 10% YoY following an asset disposal coupled with higher marketing expenses. While keeping our forecasts relatively unchanged, we trim our dividend payout forecasts slightly to reflect higher capex. We reduce our TP by 4% to RM1.65 (from RM1.72) but keep our OUTPERFORM call.

Within expectations. SUNREIT’s 1QFY24 core net profit met expectations at 23% of both our full-year forecast and the full-year consensus estimate.

YoY, its gross revenue dropped by 2% following the disposal of Sunway Medical Centre (Tower A & B) in Aug 2023. Its core net profit declined by a steeper 10% due to higher marketing and finance costs.

QoQ, similarly, its gross revenue declined by 6% due to the disposal. However, its core net profit only eased slightly, we believe, due to lower utility expenses and the absence of tax.

Outlook. Sunway Pyramid Mall (11% of its NLA) is undergoing a reconfiguration following the departure of anchor tenant AEON. We do not foresee SUNREIT to have difficulty filling up the vacated space as retail space in the mall remains in high demand. Nonetheless, its retail performance could be dented during the transitional period. Meanwhile, Sunway Carnival Mall (Phase 2) is undergoing refurbishment works. Its acquisition of six hypermarkets was completed in Apr 2024. The new assets are yielding about 8% or c.RM42m/year. Overall, we remain cautious on the outlook of the retail sector given the sustained elevated inflation that eats into consumer spending power. Consumer sentiment will also be hurt by the anxiety ahead of the implementation of the fuel subsidy rationalisation.

Forecasts. Relatively unchanged.

Valuations. However, we reduce our TP by 4% to RM1.65 (from RM1.72) as we trim our FY24-25F dividend payout forecasts to 8.8 sen and 9.1 sen (from 10.6 sen and 11.2 sen) to reflect higher capex needs. The basis of our TP remains unchanged at a target yield of 5.5% (derived from a 1.5% yield spread above our 10-year MGS assumption of 4.0%), 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 of given a 3-star rating as appraised by us (see Page 4).

Risks to our call include: (i) bond yield expansion, (ii) lower-than- expected rental reversions, and (iii) lower-than-expected occupancy rates.

Source: Kenanga Research - 17 May 2024