Overview and Recommendation

Sunway REIT (SREIT MK) has achieved a record-breaking financial performance for FY24, driven primarily by its retail and hotel segments. The report from Maybank Investment Bank Berhad upgrades Sunway REIT to a “BUY” recommendation with a revised dividend discount model-based target price (DDM-TP) of MYR2.13, reflecting a 19% upside from its current share price of MYR1.87. The positive revision is attributed to a lower beta assumption, which has reduced the cost of equity to 7% from the previous 8.1%.

FY24 Financial Performance

The REIT’s 4Q24 earnings and gross DPU of 5.34 sen met expectations, achieving 101% and 98% of Maybank and consensus forecasts, respectively. FY24 core net profit stood at MYR343.8 million, marking an 8% year-on-year (YoY) increase. Key highlights include:

• Retail: Sunway Pyramid Mall recorded a 6.7% YoY revenue growth, bolstered by the reopening of the Oasis Wing in November 2024.
• Hotel: Occupancy rates improved modestly by 1% YoY, while the average room rate (ARR) grew by 3%.
• Office: Stable performance with Sunway Putra Tower securing a new government tenant to replace CIDB, expected to move in by late FY25.
• Industrial: Positive contributions from newly acquired S.Prai and improved occupancy at S.PJ 1, which rose from 0% in 2023 to 30% in 2024, with a target of 60% by end-2025.

Growth Drivers for 2025

Sunway REIT’s growth in 2025 is projected to stem from strategic acquisitions and asset enhancement initiatives (AEIs). Key developments include:

• Full-year contributions from newly acquired properties such as 163 Retail Park, six hypermarkets, Kluang Mall, and AEON Sri Manjung.
• Completion of AEIs, including the reopening of Sunway Pyramid’s Oasis Wing and the ongoing S.Carnival Mall AEI, targeted for mid-2025.
• A MYR400 million redevelopment of Sunway Pier, expected to be completed by 2027.

Management also anticipates mid-single-digit rental reversions in FY25, a slight moderation from the low-teens achieved in FY24.

Adjusted Earnings Forecasts

Maybank Investment Bank has adjusted its FY25/26 earnings forecasts downward by 7.7% and 8.4%, respectively, to account for distributions to perpetual note holders. A MYR500 million perpetual note issued in October 2024 at 4.63% replaced a previous note that had been fully redeemed in April 2024. Additionally, net gearing is expected to rise to 43% in FY25 from 41% as of December 2024, driven by anticipated acquisitions.

Segmental Performance Analysis

Retail Segment

The retail segment remains the cornerstone of Sunway REIT’s portfolio, contributing MYR529.6 million in revenue for FY24, a 12% YoY growth. Key contributors include:

• Sunway Pyramid Mall: Revenue grew by 6.7% YoY to MYR96.7 million in 4Q24, driven by the reopening of the Oasis Wing.
• Sunway Carnival Mall: Revenue rose by 17.4% YoY to MYR79.9 million for FY24, benefiting from AEIs.
• New Acquisitions: Properties such as 163 Mall and six hypermarkets contributed positively, with hypermarkets generating MYR6.7 million in 4Q24 alone.

Hotel Segment

The hotel division saw a revenue increase of 9.6% YoY to MYR95.5 million in FY24. Key highlights include:

• Sunway Resort: Revenue surged by 41.9% YoY to MYR35.9 million, reflecting strong recovery trends.
• Sunway Putra Hotel: Revenue grew by 13.7% YoY to MYR12.6 million, supported by improved occupancy and ARR.

Office Segment

The office segment remained stable, contributing MYR83.1 million in revenue for FY24, a marginal YoY increase. Sunway Putra Tower secured a new government tenant, expected to commence tenancy by late FY25.

Industrial and Services Segments

The industrial segment demonstrated robust growth, with revenue more than doubling to MYR10.3 million in FY24. Contributions from newly acquired S.Prai and improved occupancy at S.PJ 1 played a significant role. The services segment generated MYR38.4 million in FY24, a modest rise of 2.3% YoY.

Valuation and Risks

Maybank IBG’s DDM-based valuation places Sunway REIT’s target price at MYR2.13 per share. The valuation incorporates a 1% terminal dividend growth rate and a 7% cost of equity. However, several risks could impact earnings and valuation, including:

• Fluctuations in rental and occupancy rates.
• Changes in operating expenses and interest rates.
• Potential impacts from another pandemic.
• Lease renewals, with 42% of Sunway Pyramid Mall’s net lettable area (NLA) due for renewal in FY25.

Conclusion

Sunway REIT’s strong performance in FY24 and its strategic initiatives for FY25 position it as a compelling investment opportunity. The “BUY” recommendation by Maybank Investment Bank Berhad underscores its growth potential, supported by strategic acquisitions, AEIs, and a resilient portfolio mix. With a revised target price of MYR2.13, Sunway REIT offers a promising outlook for investors seeking exposure to Malaysia’s real estate investment trust market.