Sunway REIT continues to deliver solid performance

Maintain hold with target price (TP) of RM1.60: Sunway Real Estate Investment Trust (SunREIT)’s nine months ended March 31 of financial year 2015 (9MFY15) gross revenue of RM338.5million (+6.3% year-on-year [y-o-y] was translated into normalised net profit of RM183.5 million (+4.3% y-o-y), accounting for 73.9% and 74.3% of Hong Leong Investment Bank Bhd’s (HLIB) and consensus financial year forecasts, respectively. As expected, the third interim dividend of 2.13 sen (1.79 sen taxable and 0.34 sen non-taxable) was declared during third quarter with ex-date on May 14.

Year to date (YTD) dividend amounted to 6.68 sen per unit (FY14: 6.33 sen) accounting for 75% of our full-year distribution per unit assumptions.

SunREIT continues to deliver solid performance with 11.1% y-o-y growth for 9MFY15. This is mainly contributed by Sunway Pyramid and Sunway Carnival on the back of higher rental reversion, service charge and also improved occupancy level.

YTD contribution from the hotel segment has come down by 5.3% following a decrease in overall occupancy rate (save for Sunway Hotel Tower and Sunway Hotel Seberang Jaya), mainly due to the softer business and consumer sentiment and also the closure of food and beverage outlets. Sunway Hotel Georgetown made its maiden contribution with revenue and net property income of RM600,000 and RM500,000 respectively, in the third quarter.

Similarly the office segment also delivered sluggish performance (revenue down by 9.3% y-o-y) driven by lower occupancy rate across all office buildings, except for newly-acquired Wisma Sunway. We reiterate our concern about vacancy across all office buildings given the oversupply of office space, coupled with weak business sentiment.

Management also shared that Sunway Putra Place is on track for completion by the fourth quarter ending June 30 (4QFY15).

Risks are that SunREIT is highly reliant on Sunway Pyramid and the intensifying competition for assets and tenants.

Its positives are that it has the largest acquisition pipeline among Malaysian REITs, strong backing from sponsor, it is well-diversified across various segments with low tenant concentration and synergy with sponsor’s townships.

Negatives are that it is still heavily reliant on Bandar Sunway, which will take time to change, persistent weakness in the office segment due to the oversupply of new office space.

We maintain our “hold” recommendation on the equity and unchanged TP.

Targeted yield is at 6.2% based on the historical average yield spread of SunREIT and seven-year Malaysian Government Securities. — HLIB Research, April 30