Summary

• UOA Real Estate Investment Trust (UOAR) 1Q23 core net profit fell 8.8% YoY to RM14.2m. The results came in slightly below expectations, amounting to 23.1% of our full year forecast at RM61.5m and 21.8% of the consensus at RM65.2m. Key deviations were mainly due to a decline in the occupancy rates of Wisma UOA II.

• YoY, a decline in core net profit was mainly attributed by (i) occupancy rate of Wisma UOA II declined from 67.0% to 64.0%, leading to a 11.7% decline in gross rental income to RM3.9m, which has offset a higher gross rental income generated from other buildings of UOAR’s portfolio, and (ii) increase in total expenditure by 6.7% YoY due to an increase in electricity and borrowing cost.

• Notably, with the exception of Wisma UOA II, all other buildings in UOAR’s portfolio have demonstrated a YoY improvement in occupancy rates. As at 1Q23, the occupancy rate for older buildings aged more than 20 years including UOA Centre and Wisma UOA Damansara I stood around 75.0-77.0%. For newer buildings such as Menara UOA Bangsar and UOA Corporate Tower, occupancy rate recorded around 92.0-97.0%.

• As at 1Q23, UOAR portfolio’s weighted average lease expiry (WALE) stood at 1.02, as compared to 1.33 and 1.08 in FY21 and FY22, respectively. We expect the portfolio’s WALE to increase gradually over FY23, as overall tenancy expiry profile stood above 56.5% in FY23.

• Gearing ratio increased slightly to 39.9% from 39.1% as at FY22. As 40.0% of UOAR’s debts are floating rate loan, we expect the borrowing cost will increase after Bank Negara Malaysia’s Monetary Policy Committee raised the overnight policy rate (OPR) by another 25-basis point to 3.00%.

• Moving forward, we remained cautiously optimistic on the office space outlook as market sentiment remained soft amid uncertainties arising from elevated inflation, geopolitical tension and potential future interest rate hikes. Meanwhile, rental rates are expected to be flat upon renewal of tenancies.

Valuation & Recommendation

• Although core net profit came in slightly below our expectations, we remained our forecasted earnings unchanged at RM61.5m, RM62.1m, and RM63.2m respectively, taking into account the expectation of gradual improvement in occupancy rate towards 2023 year-end, given the strategic locations of UOAR’s portfolio properties.

• We retained our BUY recommendation on UOAR, with an unchanged target price at RM1.27. The target price is derived by ascribing a P/E of 14.0x to FY23f EPS of 9.1 sen. Meanwhile, we assumed a 90.0% payout from the trust’s distributable income over the next three years, in order to qualify for tax relief SC’s guideline.

• Risks to our recommendation include a possible slow improvement in rental activities amidst soft market sentiment in a post-pandemic environment. Besides, the higher borrowing cost and electricity tariff may continue to weigh on UOAR’s margins and bottom line moving forward.

Source: Mplus Research - 5 May 2023