KEY INVESTMENT HIGHLIGHTS

• FY20 earnings below our expectation
• Lower contribution from retail and hotel divisions
• Gradual recovery for retail division
• Earnings estimates revised downwards
• Maintain BUY with an adjusted TP of RM1.70

FY20 earnings below our expectation. Sunway REIT FY20 core net income of RM249.5m came in within consensus expectation but below ours, making up only 91% of our estimate. The negative deviation could be attributed to the weaker than expected earnings from retail and hotel divisions. Meanwhile, distribution per unit (DPU) of 2.38sen was announced for 2HFY20, bringing cumulative DPU to 7.33sen which translates into 4.9% yield.

Lower contribution from retail and hotel divisions. Sunway REIT’s FY20 core net income was lower at RM249.5m (-12.9%yoy), mainly due to weaker contribution from retail and hotel divisions which were both adversely affected by Movement Control Order (MCO). Net property income (NPI) of retail division fell by 20%yoy, dragged by rental support to assist tenants and lower carpark income. Similarly, NPI of hotel division eased by 13%yoy as Covid-19 pandemic has impacted tourism industry. Nevertheless, performance of office division was stable by registering 12%yoy growth in NPI due to improved performance from its office properties. Likewise, NPI of services division jumped by 92%yoy mainly due to income contribution of Sunway University and College campus as well as higher rental income from Sunway Medical Centre.

Gradual recovery in retail division. We expect better outlook for retail division in FY21 as we gather that footfall at Sunway Pyramid shopping mall has recovered to 60%-70% of pre-Covid19 levels. We also reckon the quantum of rental support to be smaller in FY21 as tenant sales recover. Meanwhile, outlook for hotel division is expected to be challenging as restrictions on domestic and inbound travel will continue to hit the hotel industry. Hence, Sunway REIT plans to capitalize on the window of opportunity to undertake phased refurbishment of Sunway Resort Hotel in FY21.

Maintain BUY with a revised TP of RM1.70. We revise FY21/22F earnings by -7.1%/-4.1% as we expect closure of Sunway Resort Hotel for refurbishment to drag earnings of hotel division. Our TP for Sunway REIT is revised to RM1.70 from RM1.82 post earnings revision, based on DDM valuation. We maintain BUY call on Sunway REIT as we expect earnings to recover in the coming quarters. Besides, we like Sunway REIT’s diversify portfolio with recurring income from different segments. Meanwhile, distribution yield is estimated at 4.9%

Source: MIDF Research - 4 Aug 2020