Sunway REIT - 1Q13 within expectations

Period    1Q13

Actual vs. Expectations  1Q13 realised net income (RNI) of RM52.0m was within expectations, making up 25.2% of consensus FY13E RNI of RM206m and 24.6% of our RM211m.

Dividends   1Q13 GDPU of 2.03 sen, including 0.4sen non taxable portion, which is in line with our FY13E NDPU of 7.1 sen. 

Key Results Highlights   QoQ, 1Q13 RNI increased 8% on the back of lower finance costs (-23%) as topline was down 3% QoQ mainly due to drop in hotel income as number of Middle Eastern tourists and MICE** fell in conjunction with the Ramadhan period. However, 1Q13 saw higher revenue contributions from its retail assets; Sunway Pyramid (+5.6%) and Sunway Carnival (+17%).

 RNI increased by 18% YoY mainly due to 26% YoY drop in financing costs and more efficient capital management* (refer overleaf) 

 1Q13 reversions of 13.5% of 384,761sf of NLA in 3 years mainly attributed to Sunway Putra Tower (63.6%), Sunway Pyramid (16.4%), and Sunway Carnival (14.3%).

Outlook   Total FY13E CAPEX guided to be RM120.0m; incurred by the refurbishment of Sunway Hotel Seberang Jaya and Sunway Putra Mall, Sunway Pyramid maintenance, and car park linkage works from SRH to Menara Sunway (RM60.0m with annualised cost of RM20.0m). 

 Bearish FY13E office sector outlook as management guided that they have not been approached by many potential tenants. Impact of office oversupply could potentially compress Sunway Tower’s (55,000-60,000sf. of vacant NLA) gross rental from c.RM5.00psf to as low as RM4.50psf.

 Latest acquisition, Sunway Medical Centre (SMC) expected to increase SunREIT’s FY13E-FY14E RNI by 4.5%-8.9%, implying FY13E-FY14E gross yields of 5.2%-5.4%.

Change to Forecasts   Maintain our FY13-14E GDPU of 7.9-8.1sen, implying gross yields of 5.2%-5.4%, which has adjusted for the acquisition of SMC.

Rating  Maintain MARKET PERFORM

 Significant yield compressions nearing record low gross yields to 10-year MGS spreads leave limited total return upside.

Valuation    No changes to TP of RM1.51 based on targeted FY13E net yield of 4.6%.

Risks   Retail sector risks. Sector de-rating if investors switch to higher beta developers. Upside bias risks to calls are further compressions in the 10 year MGS beyond our expected FY13E 3.3%  

Source: Kenanga