Sunway REIT's full-year FY06/13 net profit of RM218.8m was 5% above our expectations. However, despite the positive results, we believe its outlook is cloudy, given the disruptions from refurbishments in Sunway Putra Place.
We adjust our FY14-15 earnings upwards by around 1% after adjusting our finance cost assumptions. Our DDM-based target price falls to RM1.45 from RM1.63 as we cut our risk-free rate assumptions, which raises our WACC to 9.2% from 8.9%. We maintain our Neutral rating on the stock. For exposure to retail REITs, we believe investors should look to CMMT or IGB REIT.
DPU increased by 10.7%
For the full-year FY13, distribution per unit (DPU) increased by 10.7% yoy to 8.3 sen, on the back of a 15% core net profit growth. The growth in net profit was attributed to the new income stream from Sunway Medical Centre and interest savings arising from Sunway REIT's capital management initiatives.
Flattish earnings in FY14
Management highlighted that FY14 earnings and DPU growths can be flattish mainly due to the loss of income from Sunway Putra Mall, which is currently being refurbished, while it also plans to refurbish both Sunway Putra Hotel and Sunway Putra Tower in FY14-15. This will further cause disruptions to these assets, whose occupancy rates are already low at 60.2% and 78% respectively.
RM500m asset enhancements
Sunway REIT plans to spend a substantial amount of capex over the next two to three years, with an estimated amount of more than RM500m for asset enhancement initiatives (AEIs). The ROI is expected to be around 8-10%. Approximately 50% of the capex is allocated for Sunway Putra Place.
Publish date: 07/08/13