Investment Highlights

• We maintain our BUY recommendation on UOA REIT with an unchanged fair value (FV) of RM1.42/unit based on the dividend discount model (DDM). No changes to our neutral 3- star ESG rating (Exhibits 8 & 9).

• UOA REIT’s 6MFY22 distributable income of RM31mil (excluding negligible reversal of impairment losses of financial assets and net changes on financial liabilities) came in within our expectations. It accounted for 48% of both our and consensus’ FY22F earnings. Thus, we make no changes to our earnings forecast.

• YoY and QoQ, UOA REIT’s 2QFY22 gross rental income and net property income both dipped 2%. This was mainly driven by the decline in the occupancy rate of most of its buildings, particularly Wisma UOA Damansara II, UOA Centre Parcels and Wisma UOA II.

• On a positive note, the average occupancy rate has remained stable QoQ at 79%. The decline in the occupancy rate of Wisma UOA Damansara II (-3% QoQ) to 76% was offset by the higher occupancy rate in UOA Corporate Tower (+1% QoQ) to 91% and UOA Centre Parcels (+1% QoQ) to 74% (Exhibit 3).

• In addition, its major assets, UOA Corporate Tower and Parcel B Menara UOA Bangsar (both contributing to 61% of gross rental income) are still maintaining their occupancy rate at above 90% amid rising demand for new and tech-enabled office spaces (Exhibits 2, 3).

• 29% of its tenancies are set to expire in FY22 (Exhibit 4). We expect rental reversion to be flattish upon the renewal of tenancies given the growing oversupply of office space, coupled with heightening inflation pressures on its tenants.

• UOA REIT’s net debt-to-asset ratio stayed at 39% (-1% QoQ), below the 60% statutory threshold required by the Securities Commission.

• The group’s borrowings are all under revolving credit loan facilities with a combined floating (40%) and fixed interest rate (60%). The mix of variable and fixed-rate borrowings is envisaged to mitigate the risk of higher interest rates ahead.

• UOA REIT declared its first interim gross DPU of 4.3 sen in 2QFY22, which represented a distribution payout ratio of 95%. It was slightly lower than the 4.32 sen in 2QFY21.

• Since the beginning of 2022, the yield spread between UOA REIT and the 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). However, we see a stabilisation in the 10-year MGS yield with a decline to 4.0% from the peak of 4.4% following heavy foreign selling in June 2022. FY23F distribution yield is estimated at 8.1%. 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 (Exhibit 7).

• We like UOA REIT for its long-term prospects bolstered by:

(i) its strategically located properties which are well-connected in neighbourhoods via bridges, major highways and public transportation;

(ii) its diverse tenant mix which could mitigate potential rental collection risk during economic downturn;

(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; and

(iv) large pipeline of potential assets from its sponsor – UOA Development (Exhibit 6).

• UOA REIT currently trades at a compelling FY23F PE of 12x vs. 4-year average of 17x. Meanwhile, dividend yield for FY23F of 8% is attractive vs. 10-year MGS yield of 4%.

Source: AmInvest Research - 22 Jul 2022