kelvin-ong@ambankgroup.com
DL: 2036 2294
Sunway REIT (SREIT MK EQUITY, SUNW.KL): Share price upside constrained by yield compression
13 Aug 2025
Rationale for report: Company Results
Investment Highlights
FY26F yield has compressed to 5.5%, narrowing the spread to 211bps versus the 10-year MGS, following a strong share price rally since April 2025. This limits further upside. 6M25 earnings rose 22% YoY, driven by robust retail performance and contributions from newly acquired assets. NPI grew 20.1% YoY, though hotel and office segments softened due to lower occupancy. Rental reversion is expected to ease in 2H25 amid cautious consumer sentiment and potential SST-related rent pressures.
- We downgrade SREIT from BUY to HOLD with a revised target price of RM2.32 (from RM2.09/unit), based on an updated DDM valuation rolled forward to FY26. Our DDM model reflects a 7.5% WACC, 3.9% debt cost, 0.9 beta, and 2.0% long-term growth. Our earnings forecast and 4-star ESG rating remain unchanged. Following a strong share price rally since April 2025, FY26F yield has compressed to 5.5%, narrowing the spread to 211bps vs the 10-year MGS yield of 3.39%. The current yield spread of 211bps is below the historical average of nearly 300bps (since Jan 2023). With less than 15% upside to the share price, a HOLD call is warranted.
- 6M25 earnings rose 22% YoY to RM195mil, driven by strong retail performance which aligned with expectations. Adjusted distributable income for the first half of FY25 reached 48.5% of our full-year forecast and 49.4% of the consensus estimate. Gross revenue grew 21.5% year-over-year, supported by contributions from assets acquired in 2024–including six hypermarkets, Sunway 163, Kluang mall, and an industrial property in Prai–as well as stronger performance from Sunway Pyramid and Carnival Mall. NPI grew 20.1% YoY, supported by retail asset strength but moderated by softer hotel and office segments’ performance due to lower occupancy and travel disruptions, with foreign hotel guests down 4% YoY to 53% YTD. Net interest expense increased 12.8% YoY to RM78.2mil on higher borrowings and average cost of debt to 3.88% (+2bps). QoQ, distributable income declined 2.1% to RM96.5mil due to softer retail NPI.
- Retail and industrial assets saw higher occupancy, while hotel and office properties experienced declines. Retail and industrial occupancy rose 2% and 16% YoY, while hotel and office declined 2%. YoY, average retail rents edged up 1%, hotel room rates dipped 1%, average office rents fell 1%, and industrial rents surged 16% on stronger occupancy at Sunway REIT Industrial – PJ1.
- Softer rental reversion for retail assets in 2H25 amid cautious consumer spending and the likely impact of SST. 2Q25 rental reversion was in the low teens vs. high single digits in 1Q25. However, management guides for mid-single digit reversion in 2H25, reflecting cautious consumer sentiment and potential SST-related rent pressure. Sunway Carnival Mall’s Phase 2 reopened in late 2Q25, with higher rental expected in 3Q25 from a full quarter’s rent contributions. Meanwhile, hotel bookings improved in July-August, likely boosting occupancy and rental contributions from the hospitality segment in 3Q25.
EXHIBIT 1: RESULTS SUMMARY
| FY 31 Dec (RMmil) | 2QFY24 | 1QFY25 | 2QFY25 | QoQ (%) | YoY (%) | 6MFY24 | 6MFY25 | YoY (%) |
|---|---|---|---|---|---|---|---|---|
| Gross Revenue | 175.6 | 218.9 | 211.4 | (3.4) | 20.4 | 354.2 | 430.3 | 21.5 |
| Property Operating Expenses | (46.3) | (61.7) | (56.5) | (8.4) | 22.1 | (94.3) | (118.2) | 25.3 |
| Net Property Income | 129.3 | 157.2 | 154.9 | (1.5) | 19.8 | 259.8 | 312.1 | 20.1 |
| Net investment income | 195.5 | 157.3 | 182.0 | 15.7 | (6.9) | 326.1 | 339.2 | 4.0 |
| Manager’s fee | (11.3) | (12.7) | (13.0) | 2.2 | 15.1 | (22.5) | (25.7) | 14.1 |
| Trustee’s fee | (0.2) | (0.3) | (0.2) | (22.2) | 2.0 | (0.4) | (0.5) | 17.2 |
| Other trust expenses | (1.0) | (0.5) | (0.7) | 46.5 | (26.5) | (1.8) | (1.2) | (32.7) |
| EBIT | 183.0 | 143.8 | 168.0 | 16.9 | (8.2) | 301.3 | 311.9 | 3.5 |
| Net interest income/expenses | (37.9) | (39.5) | (38.7) | (2.0) | 2.0 | (69.3) | (78.2) | 12.8 |
| Profit before El | 145.1 | 104.3 | 129.4 | 24.0 | (10.8) | 0.0 | 0.0 | n.a. |
| Exceptional item (EI) | 0.0 | 0.0 | 0.0 | n.a. | n.a. | 0.0 | 0.0 | n.a. |
| Associates/JV contribution | 0.0 | 0.0 | 0.0 | n.a. | n.a. | 0.0 | 0.0 | n.a. |
| Profit Before Taxation | 145.1 | 104.3 | 129.4 | 24.0 | (10.8) | 232.0 | 233.7 | 0.7 |
| Taxation | 0.0 | 0.0 | 0.0 | n.a. | n.a. | 0.0 | 0.0 | n.a. |
| Minority Interest (MI) | 0.0 | 0.0 | 0.0 | n.a. | n.a. | 0.0 | 0.0 | n.a. |
| Net Income | 145.1 | 104.3 | 129.4 | 24.0 | (10.8) | 232.0 | 233.7 | 0.7 |
| Adjustment | (67.0) | (5.7) | (32.8) | 475.1 | (51.0) | (72.0) | (38.5) | (46.5) |
| Adjusted Distributable Income | 78.0 | 98.6 | 96.5 | (2.1) | 23.7 | 160.1 | 195.1 | 21.9 |
| Distribution: | ||||||||
| EPU (sen) | 2.3 | 2.9 | 2.8 | (2.1) | 23.7 | 6.6 | 5.7 | (13.7) |
| Declared DPU (sen) | 4.7 | 0.0 | 5.7 | n.a. | 21.9 | 4.7 | 5.7 | 21.9 |
| NAV/unit | 1.5 | 1.5 | 1.5 | 0.5 | 2.6 | 1.5 | 1.5 | 2.6 |
| Weighted average units in issue (‘Mil) | 3,424.8 | 3,424.8 | 3,424.8 | (0.0) | 0.0 | 3,424.8 | 3,424.8 | 0.0 |
| Margin: | ||||||||
| Net Property Income Margin (%) | 73.6 | 71.8 | 73.3 | 2.0 | (0.5) | 73.4 | 72.5 | (0.8) |
| EBIT margin (%) | 82.6 | 47.7 | 61.2 | 28.4 | (25.9) | 65.5 | 54.3 | (11.2) |
| Net Interest Coverage (x) | 4.8 | 3.6 | 4.3 | 19.3 | (10.0) | 4.3 | 4.0 | (0.4) |
| Debt/Asset Ratio (%) | 43.7 | 41.8 | 41.2 | (1.5) | (5.8) | 43.7 | 41.2 | (2.5) |
EXHIBIT 2: VALUATION: SREIT
| WACC | 7.5% (from 7.7%) |
| Weighted Cost of Equity | 6.2% |
| Average Cost of Debt | 3.9% (from 4.0%) |
| Market risk premium | 7.0% (from 7.1%) |
| Beta | 0.9 |
| Long term growth rate | 2.0% |
| ESG Premium | 3% premium |
| 12-month target price | RM2.32 (from RM2.09) |
EXHIBIT 3: DIVIDEND DISCOUNT MODEL (DDM)
Assumption for Weighted Average Cost of Capital (WACC)
| Risk Free Rate | 3.5% |
| Beta | 0.9 |
| Market Return | 11% |
| Cost of Equity (Ke) | 9.5% |
Average Cost of Debt
3.9%
Capital Structure: (RM Mil)
| RM Mil | % | |
|---|---|---|
| Market Cap | 7,363.3 | 65.2% |
| Total Borrowing | 3,934.5 | 34.8% |
| Total | 11,297.8 | 100.0% |
Weighted Average Cost of Capital (WACC):
| Weight | Cost | W x C | |
|---|---|---|---|
| Cost of Equity (Ke) | 65.2% | 9.5% | 6.2% |
| Average Cost of Debt | 34.8% | 3.9% | 1.4% |
| WACC | 7.5% |
Multi-Stage DDM
| 2026 | 2027 | 2028 | 2029 | 2030 | Terminal Value | |
|---|---|---|---|---|---|---|
| Period | 1 | 2 | 3 | 4 | 5 | |
| Dividends (RM) | 0.12 | 0.12 | 0.13 | 0.13 | 0.14 | 2.50 |
| Present Value (RM) | 0.11 | 0.11 | 0.10 | 0.10 | 0.09 | 1.74 |
| Valuation | 2.26 |
| (+3%) adjustment for 4-star ESG rating | 0.06 |
| Fair Value/unit (RM)+ESG | 2.32 |
| WACC (%) | 7.5% |
| Growth Rate (%) | 2% |
Company profile
SREIT is a diversified REIT. Retail assets make up 63% of its total assets under management followed by hotels (19%), offices (10%), services (6%) and industrial and others (2%). Average occupancy rate for its retail properties stood at a high 97%.
Investment thesis and catalysts
After a strong share price rally since April, FY26F yield has compressed to 5.5%, reducing the yield spread to 211bps versus the 10-year MGS yield of 3.39%. This is below the historical average of nearly 300bps since January 2023. With limited share price upside of under 15%, we see a HOLD recommendation as appropriate.
Valuation methodology
We are valuing the stock based on DDM with a WACC of 7.5% (beta: 0.9, market risk premium: 7.0%, pre-tax cos of debt: 3.9%, long term growth rate: 2%)
Risk factors
Risk to our call includes higher than expected 10-year MGS yield following the elevated interest rates in US post elections which could lower distribution yield spread and attraction for the REIT. Also, any slowdown in consumption spending from a slower economic growth and subsidy rationalizations could impact the malls’ rental reversion rates and occupancy rates.
EXHIBIT 4: ESG MATRIX
| Parameters | Weightage | Rating | Rationale | |||
|---|---|---|---|---|---|---|
| Environmental assessment | ||||||
| 1. Scope 1 GHG Emissions (Revenue/Co2e) | 20% | * | * | 14.3% YoY decrease in FY24 | ||
| 2. Scope 2 GHG Emissions (Revenue/Co2e) | 20% | * | * | 31.8% YoY increase in FY24 | ||
| 3. Scope 3 GHG Emissions (Revenue/Co2e) | 20% | * | * | 3.4% YoY increased in FY24 | ||
| 4. Water usage (Revenue/water consumption) | 20% | * | * | 4.4% decreased compared to FY23 on managed assets | ||
| 5. Energy usage (Revenue/energy consumption) | 10% | * | * | 1.9% decreased YoY in FY24 | ||
| 6. Waste management (Amount of waste diverted away from the landfill) | 10% | * | * | Increased by 22.7% YoY in FY24 on diverted waste | ||
| Weighted score for environmental assessment | 100% | * | * | * | ||
| Social assessment | ||||||
| 1. Health, safety & well-being (Recorded injuries) | 25% | * | * | Number of fatalities zero | ||
| 2. Women in workforce (% of total workforce in management) | 25% | * | * | 82% in management | ||
| 3. Investment in employee training (Average number of hours of training per year per employee trained) | 25% | * | * | Increased 6.1%YoY in FY24 | ||
| 4. Procurement sourcing from local vendors (% of total procurement) | 25% | * | * | 100% | ||
| Weighted score for social assessment | 100% | * | * | * | ||
| Governance assessment | ||||||
| 1. Board age diversity (% under 60 years old) | 20% | * | 29% in FY24 similar to FY23 | |||
| 2. Board women representation (% of total board directors) | 20% | * | 43% representation in FY24 | |||
| 3. Directors with tenure below 6 years (% below 6 years category) | 20% | * | 57% | |||
| 4. Independent board directors (% of total board directors) | 20% | * | 57% – independent non-exec | |||
| 5. Remuneration to directors (% of total staff costs) | 20% | * | * | |||
| Weighted score for governance assessment | 100% | * | * | |||
| Environmental score | 40% | * | * | |||
| Social score | 30% | * | * | |||
| Governance score | 30% | * | * | |||
| Overall ESG Score | 100% | * | * | * | ||
EXHIBIT 5: FINANCIAL DATA
Income Statement (RMmil, YE 31 Dec)
| FY23 | FY24 | FY25F | FY26F | FY27F | |
|---|---|---|---|---|---|
| Gross Revenue | 715.7 | 767.1 | 836.0 | 831.5 | 844.1 |
| Property Operating Expenses | (188.8) | (197.4) | (229.1) | (234.8) | (237.7) |
| Net property income (NPI) | 526.9 | 569.7 | 606.9 | 596.6 | 606.4 |
| Net Investment Income | 516.7 | 733.2 | 607.6 | 597.4 | 607.2 |
| Net interest | (129.1) | (153.5) | (152.1) | (138.2) | (132.8) |
| Exceptional items | 0.0 | 0.0 | 21.0 | 0.0 | 0.0 |
| Pretax profit | 339.6 | 527.6 | 412.5 | 395.4 | 411.1 |
| Taxation | (1.4) | (2.9) | 11.0 | 11.1 | 11.5 |
| Minorities | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
| Net income | 338.2 | 524.7 | 402.5 | 406.5 | 422.6 |
| Adjusted Distributable Income | 319.0 | 343.8 | 402.5 | 406.5 | 422.6 |
Balance Sheet (RMmil, YE 31 Dec)
| FY23 | FY24 | FY25F | FY26F | FY27F | |
|---|---|---|---|---|---|
| Plant and Equipment | 17.4 | 16.6 | 17.8 | 19.2 | 20.5 |
| Investment Properties | 8,972.0 | 10,454.8 | 10,006.8 | 10,006.8 | 10,006.8 |
| Total non-current assets | 8,990.1 | 10,472.1 | 10,025.3 | 10,026.7 | 10,028.0 |
| Cash & equivalent | 425.3 | 289.8 | 483.4 | 515.4 | 549.5 |
| Trade receivables | 19.4 | 23.8 | 47.6 | 45.9 | 44.3 |
| Other current assets | 103.8 | 16.9 | 16.9 | 16.9 | 16.9 |
| Total current assets | 548.5 | 330.5 | 547.9 | 578.2 | 610.7 |
| Trade payables | 1.5 | 5.6 | 4.1 | 4.2 | 4.4 |
| Short-term borrowings | 1,637.0 | 1,736.7 | 971.8 | 1,302.5 | 1,551.3 |
| Other current liabilities | 268.6 | 336.1 | 264.7 | 263.3 | 267.1 |
| Total current liabilities | 1,907.1 | 2,078.5 | 1,240.6 | 1,570.1 | 1,822.8 |
| Long-term borrowings | 2,000.0 | 2,730.0 | 2,962.7 | 2,721.5 | 2,424.7 |
| Other long-term liabilities | 115.5 | 122.1 | 120.7 | 120.1 | 121.7 |
| Total long-term liabilities | 2,115.5 | 2,852.1 | 3,083.4 | 2,841.6 | 2,546.4 |
| Total Unitholders’ funds | 5,516.1 | 5,872.0 | 6,249.3 | 6,193.3 | 6,269.5 |
| NAV per unit (RM) | 1.5 | 1.6 | 1.7 | 1.7 | 1.7 |
Cash Flow (RMmil, YE 31 Dec)
| FY23 | FY24 | FY25F | FY26F | FY27F | |
|---|---|---|---|---|---|
| Pretax profit | 339.6 | 527.6 | 412.5 | 395.4 | 411.1 |
| Depreciation/Amortisation | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
| Net change in working capital | (28.3) | 124.7 | (96.7) | 0.4 | 5.6 |
| Others | 134.4 | (2,437.8) | 1,252.2 | 94.6 | 224.1 |
| Cash flow from operations | 445.6 | (1,785.5) | 1,568.1 | 490.4 | 640.7 |
| Capital expenditure | (5.6) | (3.6) | (3.9) | (3.9) | (3.9) |
| Net investments & sale of fixed assets | 130.4 | 1,482.8 | (448.0) | 0.0 | 0.0 |
| Others | 10.5 | 13.1 | 39.7 | 42.3 | 27.6 |
| Cash Flow (used in) / from Investing | 135.4 | 1,492.4 | (412.2) | 38.4 | 23.7 |
| Debt raised/(repaid) | 79.0 | 829.8 | (532.3) | 89.5 | (48.0) |
| Equity raised/(repaid) | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
| Distribution paid to unitholders | (329.5) | (341.9) | (401.9) | (405.8) | (421.9) |
| Others | (156.4) | (166.6) | (191.7) | (180.5) | (160.4) |
| Cash flow (used in) / from Financing | (406.9) | 321.2 | (1,125.9) | (496.8) | (630.3) |
| Net cash flow | 174.1 | 28.1 | 30.0 | 32.0 | 34.1 |
| Net cash/(debt) b/f | 251.3 | 425.3 | 453.4 | 483.4 | 515.4 |
| Net cash/(debt) c/f | 425.3 | 453.4 | 483.4 | 515.4 | 549.5 |
Key Ratios (YE 31 Dec)
| FY23 | FY24 | FY25F | FY26F | FY27F | |
|---|---|---|---|---|---|
| Revenue growth (%) | 9.9 | 7.2 | 9.0 | -0.5 | 1.5 |
| NPI margin (%) | 73.6 | 74.3 | 72.6 | 71.8 | 71.8 |
| Pretax margin (%) | 47.4 | 68.8 | 49.3 | 47.6 | 48.7 |
| Net income margin (%) | 47.3 | 68.4 | 48.1 | 48.9 | 50.1 |
| Interest cover (x) | 3.6 | 4.4 | 3.6 | 3.9 | 4.1 |
| DPU payout (%) | 99.8 | 99.8 | 99.8 | 99.8 | 99.8 |
| Receivable turnover (days) | 18.3 | 19.4 | 20.8 | 20.2 | 19.2 |
| Payable turnover (days) | 6.6 | 6.5 | 6.5 | 6.5 | 6.7 |
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