Sunway Real Estate Investment Trust (April 26, RM1.26)
Upgrade to buy at RM1.24 with revised target price of RM1.39: Sunway REIT's 9MFY12 results exceeded our and consensus expectations. Realised profit of RM142.5 million accounted for 79% of our and 77% of consensus forecasts. Our forecast underestimated the growth of the hospitality segment, which registered surprisingly commendable growth in a challenging economic environment.
Realised profit for 9M grew 12.9% y-o-y to RM142.5 million mainly attributable to contribution from Sunway Putra Place (starting to contribute to Sunway REIT in 4QFY11), stronger growth of the hospitality segment (28% y-o-y), as well as positive rental reversion of retail and office properties (renewed tenancy rental increased by 15.8% YTD). Strong growth across all segments was partly offset by higher financing cost (33.4% y-o-y), higher trust expenses (33.4% y-o-y) and higher operating expenses (30.2% y-o-y). Financing cost will moderate by FY13 as Sunway REIT has planned a commercial paper programme which will reduce the average cost of debt from 4.42% to about 4%.
Sunway Pyramid contributed 76% of gross revenue from the retail segment in 9M. YTD, 93.3% of Sunway's tenancies were renewed with higher rentals by about 17.2%. Driven by positive rental reversion of Sunway Pyramid, gross revenue from the retail segment increased by 12.9% y-o-y, even if we were to exclude the contribution of Sunway Putra Mall.
Gross revenue contribution from hospitality grew 27.7% y-o-y in 9M mainly due to higher occupancy rates and average daily rates of hotels in Sunway Integrated City as well as maiden contribution from Sunway Putra Hotel. The two hotels in Sunway Integrated City had strong support from the meetings, incentives, conventions, and exhibitions segment, corporate business and tourist arrivals from the Middle East.
Gross revenue from the office segment grew 33.4% y-o-y, mainly due to contribution from Sunway Putra Tower. Excluding Sunway Putra Tower's contribution, gross revenue grew about 3% y-o-y. The office segment will improve further in 4Q as only about 2% of Sunway Tower and 37% of Menara Sunway's tenancies were renewed. — MIDF Research, April 26
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