SUNREIT: Earnings Momentum Continues on Retail Strength and Strategic Acquisitions

Distributable income for the first nine months of fiscal year 2025 (9M25) surged by 35.9% year-on-year to RM338.7 million. This robust performance largely met expectations, representing 78.9% of the full-year target and 79.2% of consensus estimates, excluding a one-off disposal gain. Gross revenue expanded by 22% year-on-year, while Net Property Income (NPI) also saw a significant 22% year-on-year increase. The third quarter of fiscal year 2025 (3Q25) alone witnessed a strong 48.9% quarter-on-quarter rise in distributable income to RM143.6 million, driven by a notable rebound in the hotel segment.

Performance Review

The strong showing was primarily attributed to new mall acquisitions, including Sunway 163, Kluang Mall, Prai industrial property, and Aeon Mall Sri Manjung, alongside improved performance at established assets like Sunway Pyramid and Carnival Mall. A notable RM21 million gain from the sale of the Sunway University & College campus further bolstered distributable income. Additionally, a lower average debt cost of 3.83% contributed positively to the net interest expense, partially mitigating the impact of higher borrowings.

Challenges and Mixed Segments

Despite the overall positive trend, the yield for FY26F remains tight at 5.5%, translating to a spread of 200 basis points against the 10-year Malaysian Government Securities (MGS) yield of 3.5%. This compressed yield, following a strong share price rally since April 2025, limits further upside. While retail and industrial occupancy rates saw increases of 2% and 13% year-on-year in 9M25 respectively, office occupancy declined by 3% and hotel occupancy remained flat. Average retail rents posted a 2% increase, but hotel room rates slipped by 1%, and office rents also declined by 1%. Industrial rents, however, jumped 58% due to stronger occupancy at Sunway REIT Industrial – PJ1.

Future Outlook

Looking ahead, gearing is projected to ease below 38% after the RM500 million MTN repayment in October 2025. Future improvements in distributions are expected to be contingent on the acquisition of higher-yielding assets to replace the divested Sunway University & College campus. Retail rental reversion continues to hold up strongly at over 10%. Revenue contributions from the office and industrial segments are poised for improvement in 4Q25, with increased occupancy expected at Sunway Tower and Sunway Putra Tower, and Sunway REIT Industrial – Petaling Jaya 1 surpassing 70% occupancy. Management maintains a cautiously optimistic outlook for hotel assets, despite facing intensified competition from new supply.

Analyst’s Recommendation

AmInvestment Bank has maintained its HOLD recommendation for the stock, with an unchanged target price of RM2.32, based on a Dividend Discount Model (DDM) valuation. The bank notes that with limited share price upside of under 15% and the compressed yield, a HOLD call remains justified.