KUALA LUMPUR (Nov 24): Analysts gave mixed reviews on Sunway Real Estate Investment Trust (REIT) after the group posted results that are below expectations.

Maybank Investment Bank Research’s analyst Kevin Wong in a note today downgraded Sunway REIT to hold, from buy, as its earnings were below expectations.

He said the group’s 1QFY21 core net profit missed his estimates, at only 9% of his FY21 forecasts, and the results shortfall was largely due to weaker-than-expected hotel and mall earnings.

“We tweak our FY21/22/23 earnings by +1%/-14%/-7%, after mainly adjusting for softer mall and hotel earnings (i.e. slower recovery) and financial year change to December from June (18 months in FY21).

“Consequently, we lower our dividend discount model-target price by 15 sen to RM1.50. Downgrade to hold due to limited near-term earnings or dividend per unit upsides at this juncture,” he said

Wong said he turned more cautious on Sunway REIT hotels’ earnings outlook due to the ongoing pandemic-related measures (i.e. Conditional Movement Control Order from Nov 9 to Dec 6) which would prolong the hotels’ softer performances (i.e. low room occupancy and food and beverage revenue).

“Specifically, we estimate further downside to near-term rental income from Sunway REIT’s three hotels which have recently renewed its master leases (Sunway Resort Hotel & Spa, Sunway Pyramid Hotel and Sunway Hotel Seberang Jaya).

“This is attributed to its new master lease agreements where rental income to Sunway REIT is based on 90% of gross operating profit and without guaranteed rent components,” he said.

Despite the group’s earnings being below expectations, Alliance DBS Research’s analyst Siti Ruzanna Mohd Faruk maintained her buy call on Sunway REIT as she sees encouraging recovery from the group during the recovery movement control order (RMCO).

She said during the RMCO, there were encouraging improvements in retail footfall and sales with a recovery rate of 70% to 80% compared to pre-Covid levels.

“With better efficiency of keeping Covid-19 cases under control in the country, we expect stronger earnings next year,” she added.

She also opined that Sunway REIT’s earnings were partially cushioned by its portfolio mix which includes the office segment and the others segment.

“We think that having a diversified mix during a tough operating environment is key to sustaining earnings and delivering distribution,” she said.

She also said she likes Sunway REIT for its strong acquisition pipeline from its sponsor.

“We also like the diversified portfolio that helps cushion the adverse impact of the Covid-19 pandemic. As its current valuation of 1 time price to net asset value is attractive, we maintain our buy call,” she said.

However, she also cut her earnings outlook to include weaker retail and hospitality segments.

“We have also included a higher share base post completion of its private placement,” she said.

She also noted weak consumer sentiment in the retail sector and an economic slowdown could result in soft rental reversions.

“We have factored in flattish rental reversions for FY20 to FY21. If the Movement Control Order is prolonged, Sunway REIT’s earnings could be impacted further,” she said.

She also revised down Sunway REIT target price to RM1.70, from RM1.90.

At noon break, Sunway REIT fell 5 sen or 3.25% to RM1.49, valuing the group at RM5.14 billion.