Review

• Sunway REIT’s 1Q24 realised net profit attributable to unitholders of RM82.0mn (-10.4% YoY) came in within expectations, accounting for 24% and 23% of ours and consensus’ full-year estimates, respectively.

• 1Q24 distributable income per unit stood at 2.39sen. Based on the last closing price, this translates to an annualised dividend yield of 6.1%.

• 1Q24 NPI decreased by 5.6% YoY to RM130.5mn, as revenue declined by 2.3% YoY to RM178.6mn. The reductions in both revenue and NPI were mainly due to the cessation of rental income from Sunway Medical Centre (Tower A & B) following its disposal in 3Q23. However, this was partially offset by improved performance in the hotel, office, and industrial & other segments.

• 1Q24 realised net profit attributable to unitholders decreased 10.4% YoY to RM82.0mn, largely due to an 18.1% rise in finance costs as a result of the higher average cost of debt due to cumulative Overnight Policy Rate hikes of 125 basis points since May 2022. In 1Q24, the average cost of debt stood at 3.85%, compared to 3.6% in 1Q23.

• Segmental wise, the retail segment's NPI decreased by 3.3% YoY to RM86.9mn due to higher marketing costs for the festive season. In contrast, the hotel segment’s NPI grew by 3.4% to RM18.1mn, driven by increased domestic and leisure travellers during festive seasons and school holidays, a recovery in international travel, and sustained demand for MICE activities.

• The office segment maintained stable performance, while the service segment experienced a 40% 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 48% YoY increase in NPI, mainly driven by a new tenant occupying 27% of the net lettable area at Sunway REIT Industrial – Petaling Jaya 1.

• Sequentially, realised net profit attributable to unitholders increased by 11% QoQ in 1Q24. This growth was primarily driven by improved retail performance, higher interest income, and lower finance costs, partially offset by lower income from the hotel segment.

Impact

• Maintain earnings forecasts.

Outlook

• Sunway REIT has successfully completed the acquisition of six hypermarkets on 30th April, boasting an initial yield of approximately 8%. This acquisition is poised to significantly contribute to rental income, offsetting the void left by Sunway Medical Centre's disposal. With this addition, Sunway REIT’s portfolio has expanded to 25 properties, elevating its assets under management to RM9.5bn. Management anticipates that the proposed acquisition of an industrial property in Prai and 163 Retail Park will be completed in the third quarter of this year.

• Looking ahead to 2024, management maintains cautious optimism, bolstered by the resilient performance of the retail segment and the steady recovery of tourist arrivals, which is expected to positively impact the hotel segment. Furthermore, management foresees unlocking additional NPI potential through the completion of proposed acquisitions as well as the ongoing asset enhancement initiatives in Sunway Pyramid Mall, targeted for completion in the second half of 2024.

Valuation

• Rolling forward our valuation base year to CY25, we arrive at a new TP of RM1.88/unit (previously RM1.80/unit), based on a target yield of 5.5%. Maintain Buy.

Source: TA Research - 17 May 2024