AmInvestment Bank Bhd and MIDF Research have both placed “buy” calls for the trust with a target price of RM1.84 and RM1.73 respectively.
Both research houses said that the trust’s first quarter earnings were within expectations.
AmInvest said “We make no changes to our earnings forecasts as Sunway REIT’s Q1 FY2023 distributable income of RM92 million came in within our expectations and consensus. It accounted for 29% of our FY2023 earnings and 25% of consensus”.
Sunway REIT’s net property income (NPI) for the first quarter ended March 31, 2023 (Q1 FY2023) jumped 16.3% year-on-year (y-o-y) to RM138.3 million from RM118.9 million.
Revenue also grew 18.7% y-o-y from RM153.97 million to RM182.8 million in Q1 FY2023.
AmInvest attributed the higher NPI and revenue to improved performance of Sunway REIT’s retail segments, particularly, Sunway Pyramid and Sunway Carnival.
On a quarter-on-quarter (q-o-q) comparison, the trust’s Q1 FY2023 gross revenue fell 2% while NPI dropped 5%.
AmInvest said this was mainly attributed to lower income from its hotel segments in Q1 FY2023 compared to the stronger Q4 FY2022 results, which was driven by increased demand for vacations during the year-end holiday season.
From the previous quarter (4Q FY2022), average occupancy rate for overall segments rose steadily to 79% in Q1 FY2023 from 77% in Q4 FY2022.
AmInvest said “We like Sunway REIT for its well-diversified income base which could cushion potential downside risks. Its portfolio encompasses retail malls, offices, hotels, universities, hospitals and industrial properties across Malaysia”.
“Also, the group is recognised for its environmental, social and governance (ESG) practices,” the research house added.
Going forward AmInvest sees a positive rental reversion (higher rental rate compared to the current rate) of 5% in FY2023 or FY2024.
It said Sunway REIT’s tenant sales in Q1 FY2023 were 10% higher than pre-pandemic levels (Q1 FY2019) on the back of the festive season and strong demand for out-of-home dining.
The stronger tenant sales are anticipated to provide the group with the opportunity to negotiate for higher rentals in subsequent years.
AmInvest said that while a majority of Sunway REIT’s leases are expiring this year, it believes that most of the leases will be renewed. This is in view of the substantial improvement in tenant sales and footfall in retail malls.
AmInvest highlighted that Sunway does not intend to extend its lease with Sunway Pyramid’s anchor tenant Aeon that is due to expire in September 2023, as it plans to convert the space into smaller specialty stores which carry higher rental rates.
For its industrial segment, Sunway REIT is in the midst of negotiation with prospective tenants to lease out its newly acquired industrial property in Sungei Way, Petaling Jaya.
The research house expects the average occupancy rate of the group’s hotel properties to gradually improve in the next two years and fully recover to pre-Covid-19 levels in FY2025.
For its office segment, given Wisma Sunway’s resilient tenant base (of whom 97% are government agencies), AmInvest feels confident with the building’s tenant renewals despite renewals of 78% of the floor space expiring in FY2023.
On the note of the trust’s competitiveness compared to 10-year Malaysian Government Securities (MGS) yields, AmInvest said that it expects a pause in the monetary tightening cycle going forward.
Yields from the 10-year MGS rise with increases in interest rates. Any increase in MGS yields, thus, will make the instument a better investment option than REITs.
Therefore, it said Sunway REIT is expected to be appealing to yield-seeking investors, with its higher distribution spread against 1–year MGS.
MIDF echoed a lot of AmIvest’s comments, adding that the earnings outlook is also supported by Sunway REIT’s recent acquisition of six hypermarkets from the Employees Provident Fund for RM520 million which is expected to be “distribution per unit (DPU) accretive”.
DPU accretive refers to how much more cash a REIT unitholder can receive, usually after an acquisition of a property by the REIT which potentially increases its net property income.
There was no income distribution declared in Q1 FY2023 due to its semi-annual distribution policy.
At press time, the trust was up 1 sen or 0.63% to RM1.61, valuing it at RM5.51 billion.
Sunway REIT’s unit price has risen 10.27% or 15 sen since the start of the year.