Summary

• UOA Real Estate Investment Trust (UOAR) 2Q22 core net profit improved 1.2% YoY to RM15.2m, as lower expenditure resulted from a reversal of impairment losses recorded in the current quarter comfortably offset a 1.7% YoY decrease in revenue pressured by lower occupancy rate of older buildings. The results came in largely in line with our expectations, amounting to 47.5% of our full year forecast at RM64.8m. Meanwhile, an income distribution of 4.30 sen per unit, payable on 30th August 2022 was declared.

• QoQ, however, core net profit declined 2.0% primarily due to overall lower gross rental income contributed from majority of the buildings except for Wisma UOA Damansara I, coupled with the increased direct operating expenses from Wisma UOA II, Wisma UOA Damansara II, and Menara UOA Bangsar.

• Overall, occupancy rate saw a mild declining trend since 4Q21 for most of UOAR’s buildings but it remained relatively stable thereafter. As at 2Q22, the occupancy rate for older buildings aged more than 20 years which include UOA Centre, Wisma UOA II, and Wisma UOA Damansara I stood around 67.0-74.0%. For newer buildings such as Menara UOA Bangsar and UOA Corporate Tower, occupancy rate reached above 90.0%.
   
• Moving forward, we do not foresee a rapid growth in occupancy rates due to lingering effect from the Covid-19 pandemic as well as the inflationary pressures on the global economy which may risk on economic recovery. Rental rates are also expected to remain flat upon renewal of tenancies.

• Nevertheless, we are positive on UOAR’s outlook over longer term as rental activities are appeared to be on the road of recovery amid reopening of economic activities and national borders. Meanwhile, we continue to like UOAR’s Right of First Refusal over UOA Development Bhd’s investment assets which granted the group a series of potential pipeline which include retail and convention centre, hotel, and office tower.

Valuation & Recommendation

• As the core net profit came in largely in line with our expectations, we remained the forecasted earnings for FY22f, FY23f, and FY24f unchanged at RM64.8m, RM67.8m, and 71.0m, respectively. The earnings forecast takes into account the gradual recovery in occupancy rate amid improving rental activities, leveraging on the strategic location and good connectivity to public transportation of UOAR’s buildings.

• We retained our BUY recommendation on UOAR, with an unchanged target price at RM1.40. The target price is derived by ascribing a P/E of 14.0x to FY23f EPS of 10.0 sen. Meanwhile, we assumed a payout of 90.0% of its distributable income over the next three years, which is the minimum distribution requirement pursuant to SC’s guidelines.

• Risks to our recommendation include a resurgence in Covid-19 cases which may potentially hamper office demand while companies embraced a hybrid working model. Besides, as 40.0% of UOAR’s debts are sourced under floating rate, the group may incur higher finance cost amid an interest rate upcycle environment

Source: Mplus Research - 22 Jul 2022