KEY INVESTMENT HIGHLIGHTS

• 9MFY24 earnings within expectations
• Earnings moderated by higher finance costs
• Positive earnings outlook for retail division
• Earnings forecast maintained
• Maintain BUY with a revised TP of RM1.98

9MFY24 earnings within expectations. Sunway REIT 9MFY24 core net income of RM255m came in within expectations, making up 71% of ours and consensus' full year forecast. Note that we have excluded fair valuation gain of RM66m from newly acquired assets in our core net income calculations.

Earnings weighed by higher finance costs. Sequentially, 3QFY24 core net income increased to RM89.1m (+13%qoq), driven by higher contribution from Sunway Pyramid Mall and contributions from six newly acquired hypermarkets in April 2024. On yearly basis, 3QFY24 core net income was lower (-3.1%yoy) mainly due to higher finance costs (+26.1%yoy). That led cumulative earnings in 9MFY24 to RM255m (- 2.1%yoy). The marginal decline in earnings were mainly due to loss of income from Sunway Medical Centre which was disposed in August 2023 and higher finance costs. That has offset the better earnings contribution from retail division, hotel division, industrial division and office division.

Positive earnings outlook for retail division. Earnings outlook for retail division is positive mainly driven by Sunway Pyramid Mall. The reconfiguration of Oasis wing which accounted for 11% of Sunway Pyramid Mall's NLA is completed and opened on 1st November 2024. The occupancy rate for the Oasis wing is 99% with key tenants namely Jaya Grocer, Muji, Akemi Home, and Sports Direct. We gather that the rental reversion for Oasis wing is encouraging at more than doubled. Hence, that will spur earnings growth of Sunway REIT beyond FY25. Besides, Sunway REIT has completed acquisition of Sunway 163 Mall in October 2024 while acquisition of Kluang Mall in Johor is anticipated to be completed by end of this year. Hence, the contribution from the two assets is expected to lift earnings in FY25.

Maintain BUY with a revised TP of RM1.98. We make no changes to our earnings forecast for FY24F/25F/26F. We revise our TP for Sunway REIT to RM1.98 from RM1.90 as we input higher terminal growth rate in our dividend discount model in view of the better earnings outlook in the long-term. Meanwhile, prospect for hotel division is supported by higher room rate and occupancy rate due to higher tourist arrivals. Hence, we maintain our BUY call on Sunway REIT. Meanwhile, distribution yield is estimated at 4.9%.

Source: MIDF Research - 15 Nov 2024