Sunway Real Estate Investment Trust (Jan 28, RM1.50)

Maintain neutral with a lower target price of RM1.61 (from RM1.64): Sunway Real Estate Investment Trust’s (Sunway REIT) second quarter of financial year ended Dec 31, 2015 (2QFY16) core net profit came in within our and market expectations.

Revenue growth came mainly from improved contributions from Sunway Putra Mall (+291% quarter-on-quarter [q-o-q]), which was more than enough to offset the drop in rentals from Sunway Tower (-58% q-o-q), as the office tower’s occupancy rate fell to 21% from 67% in FY15.

The performance of most other property assets was decent with a less than 4% q-o-q growth, while its hotel segment saw a seasonal boost due to the year-end holiday period. A distribution per unit of 2.57 sen was declared.

Sunway Putra Mall’s occupancy rate rose slightly to 84.9% (from 83.9% in end-September 2015), and its net property income finally turned to the black during the quarter. In order to stay competitive, Pyramid Tower East will undergo a 12-month refurbishment exercise that will cost RM100 million to RM120 million — with a gradual closure in 3QFY16 and full closure by 4QFY16.

Aggressive marketing efforts have also been undertaken to accelerate the turnaround of Sunway Putra Hotel.

Meanwhile, the management expects a lower rental reversion for new renewals, given the influx of new retail malls and challenging economic conditions.

Overall, its near-term portfolio lease expiry profile is stable, as the next major renewal (51.5% of net lettable area) will take place only after FY18. 

We cut our FY16 to FY18 forecast earnings by about 2% per year in view of the temporary closure of Pyramid Tower East.

Despite the current headwinds in both the office and hospitality segments, we think that the REIT’s retail assets should help mitigate lower contributions from both segments.

Furthermore, with 6.4% to 6.7% FY16 to FY17 forecast dividend yields, we think that defensive investors should maintain their exposure to the REIT. — RHB Research Institute, Jan 28

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This article first appeared in The Edge Financial Daily, on Jan 29, 2016. Subscribe to The Edge Financial Daily here.

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