Review

• Sunway REIT’s 1H24 realised net profit attributable to unitholders of RM160.0mn (+0.8% YoY) came in within expectations, accounting for 47% and 45% of ours and consensus’ full-year estimates, respectively.

• Sunway REIT declared a first income distribution of 4.66sen (+0.9% YoY). This works out to a 5.6% annualised dividend yield based on the last closing price.

• In 1H24, NPI increased by 2.1% YoY to RM259.8mn, with revenue rising 0.9% YoY to RM354.2mn. The growth in both metrics was driven by stronger retail and hotel segment performance, though partially offset by reduced income from the service segment due to the disposal of Sunway Medical Centre (Tower A & B) in 3Q23.

• Segmental wise, the retail segment's NPI grew by 9% YoY to RM173.1mn, driven by rental contributions from six newly acquired Sunway REIT Hypermarkets and strong performance from Sunway Carnival Mall.

• Meanwhile, the hotel segment’s NPI rose 8% YoY to RM36.6mn, driven by increased tourism activity and a higher average occupancy rate, up from 60% in 1H23 to 62% in 1H24.

• 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 49% 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 decreased by 5% QoQ in 2Q24 to RM78.0mn. This decline was primarily due to a 1.0% decline in NPI, lower interest income from reduced cash placement, and higher finance costs. The drop in NPI was partly due to the retail segment's stronger performance in 1Q24, which benefited from New Year festivities.

Impact

• We raise FY24-FY26 earnings by 0.9% to 3.1% to reflect: 1) the contribution from newly acquired Sunway REIT Hypermarkets and 2) the anticipated rise in NPI from reconfigured areas following asset enhancement initiatives (AEIs), offset by higher finance costs due to additional borrowings for the acquisitions and AEIs. Conference Call Highlights

• During the conference call, management shared updates on ongoing AEIs. Sunway Pyramid Mall is reconfiguring 11% of its net lettable area, with completion expected by November 2024, and over 90% of this space is already leased with positive rental reversion. At Sunway Carnival Mall, Phase 2 refurbishment of the existing wing is scheduled to complete by June 2025, with more than 90% of tenants secured. While the ongoing AEIs may have a slight impact on retail segment growth in FY24, the new rental income from Sunway REIT Hypermarkets is expected to partially offset this effect.

• Management reported a 10% rental reversion for Sunway REIT's portfolio in 1H24, up from 8% a year earlier and exceeding the initial mid-single-digit guidance for FY24. The retail segment performed notably well, with rental reversion in the mid-teens for 1H24, fuelled by a robust retail outlook. Additionally, management highlighted the potential for further upside in NPI in FY25, as new leases for reconfigured areas are set at double the previous rates.

• The office segment is expected to maintain a stable performance. Meanwhile, management is optimistic about the hotel segment, anticipating continued occupancy growth in 2024 due to increased domestic leisure, corporate, MICE activities, and medical tourism.

• Management anticipates finalising the proposed acquisitions of the industrial property in Prai, 163 Retail Park in Mont Kiara, and Kluang Mall in Johor in the second half of the year. Looking ahead, Sunway REIT will persist in actively identifying and acquiring properties that align with its investment criteria and deliver attractive yields.

Valuation

• Following the change in earnings estimates, we arrive at a new TP of RM1.98/unit (previously RM1.93/unit), based on a CY25 target yield of 5.5% and a 3% ESG premium. Maintain Buy.

Source: TA Research - 16 Aug 2024