Sunway REIT expects improvements in hotel earnings

Sunway Real Estate Investment Trust (Aug 11, RM1.74)

Maintain hold with a higher target price (TP) of RM1.79: Excluding a fair value gain on investment properties, Sunway Real Estate Investment Trust’s (Sunway REIT) financial year 2017 (FY17) core net profit came in at RM272.4 million (+5% y-o-y). This was on the back of stronger retail and office segments, which offset the softer hotel segment. Core net profit came in line with both our and Bloomberg consensus forecasts, representing 99% and 101% of respective full-year estimates. The group also declared a fourth quarter of financial year 2017 (4QFY17) distribution per unit (DPU) of 2.27 sen (+7% year-on-year [y-o-y]), bringing FY17 DPU to 9.19 sen (vs 9.18 sen in FY16).

The 4QFY17 revenue grew 7% y-o-y, lifted by better contribution from the hotel segment (+28% y-o-y) as Sunway Resort Hotel & Spa saw stronger demand for meetings and functions and from Sunway Pyramid Hotel, fully operational since June this year. Retail revenue grew 5% y-o-y, underpinned by positive single-digit portfolio rental reversions and higher occupancy rates at Sunway Carnival Mall and Sunway Putra Mall. Accordingly, retail/hotel net property income (NPI) rose 6%/31% y-o-y.

NPI in FY17 improved 4% y-o-y to RM388.8 million but this was slightly negated by the drop of 12% y-o-y in the hotel segment NPI. While the hotel segment NPI (-73% y-o-y) was dragged down by lower contribution from Sunway Pyramid Hotel, we expect the hotel to show better performance in FY18 as it has been fully operational (capacity of 564 rooms) since June this year. We note that Sunway Putra Hotel and Sunway Hotel Georgetown recorded better occupancy in FY17, which helped cushion the soft hotel segment.

While we project a moderate performance of its office segment, we anticipate improvement in hotel earnings in FY18F (due to the reopening of Sunway Pyramid Hotel). Sunway REIT’s earnings should remain buoyant, underpinned by positive rental reversions and high occupancy rates at its retail assets, particularly Sunway Pyramid and Sunway Carnival. Following the group’s full-year results, we fine-tune our FY18-19F earnings per share by -0.8% to -1.0% and lower our distribution payout assumptions, cutting FY18-19F DPS by 5-6%.

We maintain our “hold” call but raise our divident discount model-based TP to RM1.79 (from RM1.74) as we roll over our valuations to FY19F and introduce FY20F numbers. We think the stock is fairly valued at current levels. Upside risks to our “hold” call are better average daily rates for its hotel assets while downside risks are non-renewals in its office segment (which will see a big chunk of its leases up for renewal in FY18). — CIMB Research, Aug 11

This article first appeared in The Edge Financial Daily, on Aug 14, 2017.

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