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Sunway REIT (OSK Research) maintain neutral; target price RM0.98

Sunway REIT

Within Expectation


The 1HFY11 core earnings were within our expectation but slightly below consensus’ estimates. 2QFY11 was a little bit better than expected, mainly as a result of improved performance of its Sunway Pyramid Shopping Mall. Its topline improved by 16.5% q-o-q while its core net profit, after stripping out the exceptional gains from its property revaluation surplus, was 18.1% higher q-o-q. The annualised DPU of 6.5 sen is within management’s guidance of 6.7 sen for FY11. Leaving our earnings forecast unchanged, we continue to maintain our Neutral call on Sunway REIT, with a TP of RM0.98.

Retail in the limelight. The q-o-q improvement in 2QFY11 was mainly attributed to the markedly strong rental positive reversion in 1QFY11 and 2QFY11 of 15.8% and 17.1% respectively for Sunway Pyramid. As a result, the mall now commands a much higher average monthly rental rate of RM9.39 psf vs RM8.99 psf in FY10. Because Sunway Pyramid alone contributes about 60% to the trust’s earnings, any significant changes to the mall’s earnings prospects would significantly impact on the trust’s overall performance, just as the recent 2QFY11 results have shown. The wealth effect from today’s vibrant stock market as well as fast rising property prices may lead to higher consumer spending, particularly on discretionary items. Naturally, retailers will benefit from this phenomenon and indirectly, landlords such as Sunway REIT, in the form of stronger bargaining power in rental rates and higher collection from turnover rent from the retailers, which is a potential bonus re-rating catalyst in the near future.

Lacklustre office space outlook. The massive volume of incoming office supply of >14m sq ft over the next 4 years in the Klang Valley will exert some degree of downward pressure on the rental rates of many office buildings in the region. Having said that, this should have a marginal impact on the performance of the trust in FY11 and, to a certain extent, in FY12 based on 3 factors: i) office buildings contribute merely 10% to the overall trust’s earnings; ii) Menara Sunway, located within Sunway Integrated Resort City, could to some degree, be spared from this office supply glut as there is limited new supply of office space in the vicinity; and iii) close to 90% of its leased NLA at Sunway Tower, another office building near KLCC, is up for expiry only by mid-2012.

Maintain Neutral. Given its low dividend yield of 6.6% vs sector average of 7.7% and the fact that it is trading at 1.0x P/NAV, Sunway REIT offers very limited price upside to its unitholders, at least in the medium term. That said, the ‘premium’ could be justifiable given that the trust is the largest in Malaysia. Coupled with its defensive nature and the longer term growth catalysts it potentially offers, Sunway REIT may appeal to only certain classes of investors, especially those with a defensive investment strategy. As such, we maintain our Neutral call on the trust.
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