Sunway REIT 6MFY2017 core net income within estimates

Sunway Real Estate Investment Trust (Feb 16, RM1.78)

Maintain buy with a higher target price (TP) of RM1.88: Sunway Real Estate Investment Trust’s (REIT) six months of financial year 2017 (6MFY2017) core net income of RM133.3 million met expectations, accounting for 51% and 48% of our and consensus full-year estimates respectively.

It declared distribution per unit of 2.28 sen for the quarter.

Second quarter of FY2017 core net income was flattish year-on-year (y-o-y) at RM66.5 million, bringing 6MFY2017 core net income to RM133.3 million (+4% y-o-y). The higher earnings were mainly driven by increased earnings contributions from the retail division and Sunway Medical Centre, which partly mitigated weaker earnings from the hotel and office divisions.

Net property income (NPI) of the retail division climbed 10.9% y-o-y to RM142.3 million as Sunway Pyramid Shopping Mall, Sunway Carnival and Sunway Putra Mall contributed higher rental income.

Meanwhile, the hotel segment recorded a lower NPI of RM29.3 million (-27.5% y-o-y), mainly due to loss of income from Sunway Pyramid Hotel, which was closed for major refurbishment. Similarly, the office division registered a lower NPI of RM7.7 million (-2.5% y-o-y) due to lower occupancy rates of its office buildings.

We have revised upwards our earnings forecasts for FY2017/FY2018 by 1.8%/1.6% after factoring in earnings contributions from the recently announced industrial asset acquisition. We forecast earnings to grow 6% y-o-y in FY2017, as we continue to see a positive earnings outlook for Sunway REIT.

We expect the retail division (contributed 74.6% of NPI in 6MFY2017) to grow steadily, underpinned by higher rentals from Sunway Pyramid, Sunway Carnival and Sunway Putra Mall. Meanwhile, we expect the office division to recover gradually in FY2017, from a low base in FY2016, hence render limited earnings downside risk.

Corresponding to the upwards revisions of earnings forecasts, we increase our TP for Sunway REIT to RM1.88 (previously RM1.83). Our TP is based on the dividend discount model (required rate of return: 7.1%; perpetual growth rate: 1.9%).

We continue to like Sunway REIT for its solid retail assets, which would continue spurring earnings growth going forward. — MIDF Research, Feb 15

This article first appeared in The Edge Financial Daily, on Feb 17, 2017.

For more stories, download TheEdgeProperty.com pullout here for free.