Sunway REIT - Dragged by Putra Mall and offices

Sunway REIT - Dragged by Putra Mall and offices

Author: kltrader   |   Publish date: Wed, 28 Oct 2015, 11:52 AM 

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• Upcoming 1QFY16 earnings could fall short, due to slower Putra Mall and office assets’ earnings.
• Lowering our FY16/17/18 net profit forecasts by 11%/9%/7%.
• Maintain HOLD with a lower MYR1.50 DCF-TP (-5sen).

What’s New

SunREIT’s upcoming 1QFY16 results, to be released by 29 Oct 2015, is expected to come in below our expectation. We expect 1QFY16’s core net profit to be at MYR58-60m (1QFY15: MYR63.4m, 4QFY15: MYR56.7m), accounting for just ≈20% of our 12M estimate. The shortfall in earnings could be attributed to lower-thanexpected earnings contribution from Sunway Putra Mall (SPM) due to its prolonged rent-free period offered since its soft opening on 28 May 2015. SPM has offered a 3.5-month rent-free period (Jun to mid-Sep 2015) to its tenants amid a challenging retail environment (stiff competition, more upcoming malls in the Klang Valley), we understand. We had expected just a 1-month rent-free period in June 2015. Positively, committed tenancy remains above 80%.
Elsewhere, SunREIT’s office segment has remained weak in the current soft and over-supplied office market. Sunway Tower (ST) and Sunway Putra Tower (SPT) were 20-30% occupied in end-Sep 2015, compared to 65% (ST) and 27% (SPT) at end-Jun. We expect these offices’ occupancy rates to remain low in the short-term.

What’s Our View

We lower our FY16/17/18 net profit forecasts by 11%/9%/7% after factoring in: 1) lower contributions from SPM, ST and SPT due to the longer rent-free period (in SPM) and lower occupancy rates (for ST and SPT); 2) Sunway Resort Hotel & Spa, Tower East and Putra Hotel’s FY17-18 occupancy rates remaining at 78%, 81% and 35% respectively, from our initial assumptions of a gradual improvement of +3 ppts to +5 ppts p.a..
Our new DCF-TP is MYR1.50 (-5sen; WACC: 6.6%,terminal yield:7%).
Source: Maybank Research - 28 Oct 2015