On a portfolio basis, the management of Sunway REIT (SREIT MK) guided rental reversion to reach double digits, partly attributed to the lower base during the pandemic.
RHB Malaysia Results Review today (Nov 17) maintained a BUY call at a MYR1.74 TP (Ke: 7.8%), 12% upside and c.7% FY24F yield.
RHB cited that Sunway REIT’s 9M23 results were in line with expectations, as the strong recovery in the hotel segment offset the increase in interest and utility costs.
RHB likes Sunway REIT for its diverse property portfolio, which should drive earnings growth, and its longer-term acquisitions target.
Results in line
Sunway REIT’s 3Q23 core net profit of MYR86.9m (+29.4% QoQ, flat YoY) led to a 9M23 core earnings of MYR245.6m (+2.6% YoY). This is in line with expectations at 74%/73% of ours and Street’s estimates.
The 9M23 13% revenue growth YoY was driven by recovery in the hotel segment and positive rental reversions in the retail segment.
However, this was mostly offset by 21% higher operating expense (mainly utility costs) and 43.9% higher interest expense (average borrowing cost: 3.76%).
The REIT recorded a 9M23 DPU of 7.17 sen (9M22: 7 sen).
Hotel segment’s 3Q23 revenue (+51% YoY) was boosted by a full inventory of 460 rooms at Sunway Resort Hotel from Jul 2023 onwards following the hotel’s phased reopening.
The segment’s YTD average occupancy rate improved to 63% (9M22: 54%), which in tandem resulted in an increase in average room rate.
While RHB continues to expect occupancy rate to further improve in the coming years as the tourism sector recovers (2019: 69%, 2018: 74%), the already elevated room rates should be maintained at current levels.
Retail
In 3Q23, retail revenue improved 1% YoY, boosted by the strong performance of Sunway Carnival Mall’s new wing and positive rental reversion for SunCity Ipoh Hypermarket’s anchor tenant.
For Sunway Pyramid, the REIT has secured tenants for c.68% of the space previously occupied by AEON (11% of the mall’s NLA) as it continues the reconfiguration exercise, which is expected to be completed in 4Q24.
Hypermarkets acquisition still ongoing
Revenue and NPI for the services segment dropped 13% YoY in the quarter following the disposal of Sunway Medical Centre at end-Aug. The proceeds are reserved for the proposed acquisition of six hypermarkets – still pending regulatory approvals.
Management hopes the acquisition would be finalised soon and rental contributions can begin by Jan 2024.
Earnings forecast
RHB make minor adjustments to their earnings forecast and keep s the MYR1.74 TP. Their TP incorporates a 4% ESG premium based on our in-house methodology.
Key risks: Lower-than-expected occupancy and rental reversion, longer-than-expected delays in acquisitions, and higher-than-expected costs.
Hotels Soar, Malls Stand Steady
Meanwhile, Kenanga Research Results Note today said SuREIT’s 9MFY23 results met expectations.
Its 9MFY23 core net profit grew 4% YoY as improved rental and lease incomes were partially eroded by higher electricity and interest costs.
It is positive on the outlook for its hotel and retail segments but less so for the office segment.
Kenanga maintains their forecasts, TP of RM1.63 (based on a 6.5% target yield) and OUTPERFORM call.
9MFY23 within expectations
Sunwat REIT’s core net profit for 9MFY23 of RM245.7m met expectations, making up 77%/73% for Kenanga’s full-year forecast/the consensus full-year estimate.
No dividend was declared, in accordance with its semi-annual distribution policy.
YoY, its 9MFY23 revenue increased by 13% primarily driven by an uptick in the hotel segment (+49%), attributable to improved occupancy rate of 63% YTD (vs 9MFY22: 54%) with full room occupancy at Sunway Resort Hotel since July 2023.
The growth was further supported by the retail segment (+13%) which benefited from consistent retail sales and foot traffic across all its retail malls.
Although there was an increase in revenue, the net property income only experienced an 11% rise, mainly due to higher operating expenses resulting from increased electricity costs.
Not helping bottom-line was a spike in financing cost from the full effect of a 100 bps rise in OPR. All in, its 9MFY23 core net profit grew +4%.
Outlook
As international and domestic visitors return, along with tenant sales and footfall recovering to pre-pandemic levels, it is likely that the business momentum will continue to sustain into the upcoming quarters.
Kenanga opines that forward earnings will continue to be supported by its hotel segment that has improved in 3QFY23, and this positive trajectory is anticipated to persist, driven by increased interest in domestic leisure, a rise in international tourist arrivals, and higher engagement in corporate and MICE (Meetings, Incentives, Conferences, and Exhibitions) activities.
The retail segment’s on-going finalisation of accounts for Sunway Carnival Mall expansion and refurbishment, scheduled for completion by end of 2025, may result in increased rental accretion.
While the office segment is expected to confront challenges due to an oversupply resulting from continuous incoming supply, potential support lies in the reinvention of office buildings through Asset Enhancement Initiatives.
These initiatives aim to provide improved flexibility and appeal, increasing their attractiveness to a wider tenant base.
Kenanga maintains OUTPERFORM and a TP of RM1.63. The TP is also based on their FY24F gross DPU of 10.6 sen against an unchanged target yield of 5.5% (derived from a 2.5% yield spread above our 10-year MGS assumption of 4.0%).
The low yield spread reflects Sunway’s diversified asset portfolio in key urban regions.
Kenanga reckons that the group’s brand equity also benefits greatly from its affiliation to the Sunway conglomerate. There is no adjustment to their TP based on ESG of given a 3-star rating as appraised by us.
Risks to Kenaga’s call include: (i) bond yield expansion, (ii) lower-than expected rental reversions, and (iii) lower-than-expected occupancy rates.
