Sunway Real Estate Investment Trust (Aug 10, RM1.74) 

Maintain buy with a higher target price (TP) of RM1.92: Sunway Real Estate Investment Trust’s (REIT) core net profit of RM281.9 million in the financial year ended June 30, 2018 (FY18) was within our and market expectations. Revenue increased 7.1% year-on-year (y-o-y) mainly on better performances of its retail and hotel segments, including Sunway Pyramid, Sunway Pyramid Hotel and Sunway Putra Hotel, as well as additional income from newly acquired Sunway Clio Hotel and Sunway REIT Industrial Shah Alam. 

In line with revenue growth, core earnings (excluding revaluation gain of RM144.7 million) grew by 4.2% y-o-y. A 2.15 sen distribution per unit (DPU) was declared, bringing total DPU to 9.57 sen for FY18, higher than the 9.19 sen declared for FY17.

The retail segment — the largest segment of Sunway REIT — contributed over 70.7% of net property income (NPI) in FY18. The segment recorded a modest growth of 2.4% y-o-y on higher occupancy of the Sunway Pyramid shopping mall, now close to full occupancy at 98.9% (98% in FY17) with single-digit rental reversion rates for lease renewals. The good performance, however, was slightly offset by lower income from SCI Hypermarket and Sunway Putra Mall due to negative rental reversion.

The hotel segment, which contributed 16.9% of NPI in FY18, recorded an outstanding growth of 28.2%. The increase was mainly on higher contributions from Sunway Pyramid Hotel and Sunway Putra Hotel, as well as additional contributions from newly acquired Sunway Clio Hotel. However, the segment’s performance was dragged down by Sunway Resort Hotel & Spa, which recorded lower occupancy of 73.5% (81.5% in FY17) due to softer market demand.

The expansion of Sunway Carnival Mall, Seberang Jaya, is expected to cost RM353 million. The expansion began in the third quarter of financial year 2018 (3QFY18) and should be completed in three years. It will bring the mall’s net lettable area to 817,000 sq ft from 487,000 sq ft.

We maintain our earnings forecasts for FY19 to FY20, but raise our TP to RM1.92 from RM1.88, after updating cost of equity. We believe the REIT’s expected dividend yield of 6% in FY19 is attractive for investors seeking defensive exposure. — RHB Research Institute, Aug 10

This article first appeared in The Edge Financial Daily, on Aug 13, 2018.

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