Review

• Sunway REIT’s FY23 realised net profit attributable to unitholders of RM319.0mn (-2.8% YoY) came in below expectations, accounting for 90% and 94% of ours and consensus’ full-year estimates, respectively. The negative variance was largely due to higher-than-expected finance costs. Notably, Sunway REIT’s FY23 net profit income (NPI) matched our fullyear projections at 102%.

• Sunway REIT declared a second income distribution of 4.68sen/unit, bringing the full-year DPU to 9.30sen/unit (+0.9% YoY). Based on the last closing price, this translates to a dividend yield of 5.8%.

• Sunway REIT’s FY23 core NPI increased by 5% YoY to RM526.9mn, driven by a 10% growth in revenue. The improved performance was largely attributable to the strong upsurge in hotel segment performance as well as resilient growth in the retail segment.

• FY23 realised net profit attributable to unitholders decreased 2.8% YoY to RM319.0mn, largely due to a 38.9% rise in finance costs because of the higher average cost of debt due to cumulative Overnight Policy Rate hikes of 125 basis points since May 2022. The average cost of debt stood at 3.8% in FY23, compared to 2.98% in FY22.

• Segmental-wise, the retail segment's NPI increased by 5% YoY to RM320.8mn, driven by improved retail sales and footfall, particularly from Sunway Carnival Mall's stronger performance after its new wing's launch in June 2022. The hotel segment witnessed a significant 39% YoY surge in NPI to RM82.4mn, attributed to a rise in the average occupancy rate from 54% to 64%, fuelled by increased domestic travellers during festive seasons, school holidays, a recovery in international travel, and heightened demand for MICE activities.

• The office segment maintained stable performance, while the service segment experienced a 13% YoY decline in NPI, primarily due to the discontinuation of rental income from Sunway Medical Centre (Tower A & B) following its disposal in August 2023. The industrial and other segments reported a 22% YoY decline in NPI, mainly due to operating expenses associated with the vacant Sunway REIT Industrial – Petaling Jaya 1; however, management anticipates improvement this year, with secured tenants occupying 40% of the spaces by July.

• 4Q23’s realised profit attributable to unitholders decreased 16% QoQ to RM73.4mn, mainly influenced by lower performance in the hotel segment, which had earlier benefited from an influx of Middle Eastern travellers during summer holidays in 3Q23. Additionally, the services segment decreased due to the absence of lease income from Sunway Medical Centre (Tower A & B) in 4Q23, and the retail segment experienced a dip attributed to higher marketing expenses.

Impact

• Following the 4Q23 results, we raised our cost of debt assumptions by 25bps. However, the earnings impact of this adjustment was partially cushioned by higher room rates and occupancy assumptions in the hotel segment. As a result, we have downwardly adjusted our FY24 and FY25 earnings forecasts by 5.8% and 5.3%, respectively.

Conference Call Highlights

• The management is cautiously optimistic about the retail segment, highlighting consistent improvements in footfall and tenant sales. FY23 rental reversion has touched a high single digit, largely attributed to the low base effect resulting from lease adjustments during the pandemic, indicating a return to pre-pandemic rental rates. Management anticipates a mid-single-digit rental reversion for FY24.

• Sunway Pyramid Mall is undergoing a reconfiguration involving the area previously occupied by AEON (around 11% of NLA), which is slated for completion by the end of this year. Despite AEON's departure having minimal impact on revenue (2% of Sunway Pyramid Mall’s revenue), the revitalised space is set to feature diverse offerings from unique tenants at a higher rent per square foot. More positively, management shared that it has secured tenants for about 62% of the area with positive rental reversion. At the same time, Sunway Carnival Mall in Seberang Jaya is refurbishing its existing wing, with expected completion in phases between early 2024 and late 2025, and has already secured 75% of committed tenants. The robust retail traffic and tenant sales, along with the encouraging high single-digit rental reversion achieved in FY23, are expected to mitigate the potential impact on Sunway REIT's retail segment growth in FY24 due to ongoing refurbishments in major malls.

• The office, industrial, and other segments are expected to maintain stable performance. Management holds a positive outlook for the hotel segment, anticipating ongoing occupancy growth in 2024 driven by domestic leisure, corporate, and MICE activities.

• The acquisition of six Giant Hypermarkets from the EPF for RM520mn has been delayed, awaiting approval from the Economic Planning Unit. While no specific timeline has been provided, management anticipates finalising the acquisition within the next two months. Besides, management expects to complete the proposed acquisition of an industrial property in Prai and 163 Retail Park this year. However, we have not yet included these earnings contributions in our model, as we are awaiting the completion of the acquisitions.

Valuation

• Considering the potential earnings upside from a robust domestic economy and the pending completion of new asset acquisitions, we peg Sunway REIT’s valuation at a lower target yield of 5.5% (previously 6.0%) and arrive at a new TP of RM1.80 (previously RM1.75). With a total upside of 13%, we maintain our Buy recommendation on Sunway REIT.

Source: TA Research - 31 Jan 2024