Kenanga Research raised Sunway Real Estate Investment Trust’s (SUNREIT) target price (TP) to RM1.72 from RM1.63 as the REIT’s full financial year (FY23) results met expectations and its sunny outlook in the upcoming quarters.
“SUNREIT’s FY23 results met expectations with earnings driven by enhanced rental and lease incomes. The group remains positive on
the outlook for its hotel and retail segments but less optimistic for the office segment.
“Ongoing refurbishments of existing key assets with strategic retail acquisition strive to keep its portfolio fresh and relevant,” it said in its Results Note today (Jan 31).
Thus, the research house maintained its OUTPERFORM call and FY24 earnings forecasts, which remain mostly unchanged.
“Meanwhile, we introduce our FY25F earnings forecasts and raise our TP to RM1.72 as we roll over our valuation base year to FY25F with its distribution per unit of 11.2 sen.
“(Our TP) is against an unchanged target yield of 6.5%, derived from a 2.5% yield spread above our 10-year MGS assumption of 4%. The
low yield spread reflects the REIT’s diversified asset portfolio in key urban regions.
“We reckon that the group’s brand equity also benefits greatly from its affiliation to the Sunway conglomerate. There is no adjustment to our
TP based on ESG of given a 3-star rating as appraised by us. SUNREIT is one of our sector Top Picks,” it added.
Kenanga said SUNREIT’s FY23 core net profit of RM318.3 million met its full-year forecast at 100%, but was below the consensus full-year
estimates by 6%.
“The final distribution of 4.68 sen per unit led to a full-year payment of 9.3 sen, which exceeded our anticipated 8.8 sen,” it said.
Year-on-year, the REIT’s FY23 revenue increased by 10%, primarily driven by the retail segment, an increase of 11%, which benefited from consistent retail sales and foot traffic across all its retail malls.
The hotel segment also saw an improved occupancy rate of 64% compared to 54% in FY22 with full room occupancy at Sunway Resort Hotel since July 2023.
“However, net property income margin saw some compression to 73.6%, a decline by 3.2ppt on higher utilities cost. In addition to higher financing costs from a higher interest rate cycle, FY23 core net profit came in at RM318.3 million, higher by 5%.”
Kenanga said with SUNREIT’s business operations already surpassing pre-pandemic levels, the earnings trend observed in FY23 is anticipated to stay steady in the upcoming quarters.
“We opine that forward earnings will continue to be supported by its hotel segment that has improved in 4QFY23.
“The occupancy rates are expected to keep improving in FY24, primarily driven by growth in domestic leisure, corporate, and MICE (meetings, incentives, conferences, and exhibitions), along with a return to normalcy in international and domestic tourist arrivals.”
Meanwhile, it said that Sunway Pyramid’s ongoing space refurbishment of a former anchor tenant seeks to introduce more specialty-centric stores.
“The new and existing tenants could elevate rental yields going forward with 62% of its lettable area (NLA) apparently being reserved so far. This is targeted to be completed by end of FY24.
“Additionally, the recent 163 Retail Mall acquisition could present several opportunities for the group in optimising its tenant trade mix and potentially uplift its net yield of 6.5%,” the research house added.
The risks to Kenanga’s call include bond yield expansion, lower-than-expected rental reversions, and lower-than-expected occupancy rates.
