Investment Highlights

• We maintain HOLD on UOA REIT with an unchanged fair value (FV) of RM1.08/unit based on our dividend discount model (DDM), implying a FY25F distribution yield of 7%, at parity with its 5-year median. Our FV has also incorporated a neutral 3-star ESG rating .

• We lowered our earnings forecast for FY24F by 11% as UOA REIT’s 1HFY24 distribution income of RM20.5mil came in below our expectations, making up 40% of both our earlier FY24F forecast and consensus’. However, we retain FY25F- FY26F distribution income on expectation of a replacement for an anchor tenant.

• In 1HFY24, UOA REIT’s gross revenue slid 6% YoY while net property income (NPI) fell 17.4% YoY. The lower NPI was mainly due to a decline in occupancy rate of portfolio properties, notably Parcel B – Menara UOA Bangsar (MUB).

• QoQ, UOA REIT’s gross revenue increased by 5% while NPI slid 11%. The drop in the NPI was mainly due to the increase in property operating expenses from higher sinking fund contributions, as a result of MUB undergoing works, as well as higher borrowing costs.

• QoQ, the average occupancy rate of UOA REIT improved slightly at 79% in 2QFY24 (+5.3% QoQ) . This is mainly attributed to the overall improvement in occupancy rate across all the properties except for Wisma UOA Damansara.

• To recall, the occupancy rate at Menara UOA Bangsar dropped sharply to 57% in 1QFY24 from 97% in 4QFY23 due to the departure of an anchor tenant, resulting in a notable decrease in NPI. There was a significant recovery in occupancy to 75% (+32% QoQ) due to tenant space gradually being filled up. We anticipate a gradual recovery in UOA Bangsar's occupancy towards the levels seen in FY23, supported by its prime location with direct access to the Bangsar LRT station.

• UOA Corporate Tower, the key contributor to UOAREIT (accounting for 46% of NPI in FY24) achieved remarkable occupancy of 100% in 2QFY24. Despite a substantial number of leases expiring in FY24F for UOA Corporate Tower tenants, we maintain a positive outlook due to its MSC status and strategic position within the MSC Malaysia Cybercentre @ Bangsar South City.

• We expect rental reversion to be flattish upon the renewal of tenancies given that the oversupply of office space persists, coupled with inflationary pressures impacting tenant sales.

• UOA REIT declared its gross distribution per unit (DPU) of 2.9 sen in 2QFY24, which represents a 12-month trailing DPU of 6.8 sen and a distribution yield of 6%.

• UOA REIT currently trades at a compelling FY25F PE of 14x vs. 4-year average of 15x. Meanwhile, FY25F distribution yield of 6.6% is attractive vs. the 10-year MGS yield of 3.8%.

Source: AmInvest Research - 26 Jul 2024