Investment Highlights

• We initiate coverage on UOA Real Estate Investment Trust (UOA REIT) with a BUY recommendation and a DDMbased fair value (FV) of RM1.42/unit. Our FV reflects a neutral ESG 3-star rating.

• UOA REIT is expected to record a net income of RM64mil in FY22F, RM65mil in FY23F and RM67mil in FY24F. This is after factoring a flattish rental reversion and 0.5% annual rise in occupancy rates for aged office properties. Meanwhile for new office buildings, we have assumed a modest positive rental reversion with a gradual increase in occupancy rate by 1% every year.

• Bulk of the rental income have been contributed by newer office buildings, such as Wisma UOA Damansara II, Parcel B- Menara UOA Bangsar and the UOA Corporate Tower. Rental from these office properties - aged below 20 yearsmade up 73% of the total rental income in 1QFY22.

• We expect a manageable impact to financing cost from potential hikes in the Overnight Policy Rate (OPR) in 2H2022 and 2023. For every 25bps increase in OPR, we project the group's borrowing costs to rise by RM1.7mil or 3% of distributable income in FY22F. The group’s borrowings are mainly revolving credits with a combined floating (40%) and fixed interest rates (60%). The mix of variable and fixed-rate borrowings will mitigate the higher interest risk ahead.

• Since the beginning of 2022, the yield spread between UOA REIT and 10-year Malaysian Government Securities (MGS) has been narrowing. This was contributed by the surge in the 10-year MGS yield which followed closely the rising trend of the 10-year US Treasury yield (UST). FY22F distribution yield is estimated at 7.7%. This is higher compared to its peers’ average distribution yield of 6%. We expect UOA REIT to be appealing to yield-seeking investors with its higher yield spread against the 10-year MGS in comparison with other REITs.

• We like UOA REIT for its long-term prospects bolstered by: (i) its strategic located properties which are wellconnected with the neighbourhoods via bridges, major highways and public transportation; (ii) its diverse tenant mix which could mitigate potential rental payment risk during economic downturns; (iii) its excellent track record of distributing at least 94% of net income to unitholders with a strong distribution yield of more than 7% from FY22F to FY24F; (iv) large pipeline of potential assets from its sponsor—UOA Development.

Source: AmInvest Research - 16 Jun 2022