Sunway Real Estate Investmen Trust’s (Sunway REIT) valuations are dragged by higher operating expenses, pending acquisition completion, and higher finance cost, according to Maybank Investment Bank Bhd (Maybank IB).
The research house said it cuts FY24 and FY25E earnings forecasts by 10% and 4% respectively after adjusting to full year FY23 results and adjusting for higher finance costs.
“(The reduction is also after) incorporating a longer timeline in the completion of 6 hypermarkets acquisitions, which is now expecting completion by first half of 2024 compared to January 2024 previously.
“We also introduce our FY26E forecast,” it said in its research note today (Feb 1).
It also maintained its HOLD call and roll forward dividend discount model (DDM) valuation base year to to derive a revised TP of RM1.60 from RM1.54.
Maybank IB said the REIT’s 4Q23 earnings were broadly in-line with its expectation but fell short of consensus’ estimates with FY23 core net profit at 95% and 90% respectively for the full year.
“Year-on-year (YoY), 4Q23 core earnings was dragged by higher utilities and finance costs, and in absence of contribution from Sunway Medical Centre.
“Excluding net revaluation gains of RM10.6 million, 4Q23 core net profit was RM73.4 million, lower by 17% YoY and 16% quarter-on-quarter (QoQ), bringing FY23 core net profit to RM319 million, a decrease by 3% YoY,” it said.
YoY, 4Q23 revenue grew 2% mainly due to retail higher turnover rent from Sunway Pyramid Mall and higher revenue from Sunway
Carnival Mall, and hotel as well as improved occupancy at Sunway Resort Hotel & Spa.
However, it added the REIT’s YoY bottom line was dragged by higher opex, which is higher by 35%.
“(The higher opex came from) utility cost and pre-development cost at Sunway Pier; higher finance cost, an increase by 27%; and cessation of lease income from Sunway Medical Centre for Tower A and B, following the completion of its disposal on 30 August 2023,” it added.
In terms of outlook, Maybank IB said the near-term growth in the REIT’s retail segment is expected to be marginally impacted by two on-going asset enhancement initiatives (AEIs) at Sunway Pyramid Mall and Sunway Carnival Mall.
The AEI at Sunway Pyramid, will be completed by the end of 2023 while for Sunway Carnival Mall, completion is expected in mid-2025.
“We however expect improved earnings from its other retail and hospitality assets, on the back of new acquisition of 6 hypermarkets such as Giant and 163 Retail Park, and full-room inventory at Sunway Resort Hotel.
“We estimate a proforma net gearing of 42% post completion of acquisitions compared to 38% at the end-FY23,” it added.
The risks to the research house’s earnings estimates include changes in rental rates, occupancy rates, operating expenses and interest rates may lead to lower earnings for Sunway REIT.
“About 40% of Sunway Pyramid’s net lettable area (NLA) is due for lease renewal in FY24, while 66% of its borrowings are on floating rates.
“Another earnings risk would be if another pandemic occurs. There are also potential DPU impact due to changes in master leases.”
