Summary

• Following UOA Real Estate Investment Trust’s (UOAR) softer earnings in 1Q23 (core net profit -8.8% YoY), we foresee its bottom line to remain flat over the next few quarters and expect the group’s margin to be affected by (i) the lower occupancy rate of older buildings, coupled with (ii) the ongoing impact of higher operating expenses arising from high electricity costs and borrowing costs, as well as the increased minimum wages since May 2022.

• Slow recovery in occupancy towards pre-pandemic level. Portfolio occupancy rate stood at 80.7% as at 1Q23. We expect a slow and gradual recovery in the portfolio occupancy rate towards the pre-pandemic level (91.5% in FY19) amidst widening supply-demand gap of office space as more organisations continued to re-evaluate their workplace strategies even after WHO has declared that Covid-19 has ended.

• Improving occupancy over the past quarters. On a brighter note, portfolio occupancy saw an improvement over the past four quarters with the exception of Wisma UOA II. Whilst Wisma UOA II experienced lower occupancy in 1Q23 due to the departure of multiple tenants, the vacant space at the building is gradually being filled.

• Rental rate to remain flat. For existing tenancy, UOAR’s tenancy renewal rate typically falls within the range of 80.0-90.0% under normal circumstances. Meanwhile, rental rate is expected to remain flat towards end-FY23.

• Menara UOA Bangsar obtained Stage 1 approval for MD status. Moving forward, UOAR will focus its efforts on attracting tenants from the Information and communication technology (ICT) sector. In line with its strategy, UOAR has obtained the Stage 1 approval to designate Menara UOA Bangsar as Malaysia Digital (MD) Cybercentre building

• MD Cybercentre designated buildings boasted highest occupancy rate. Notably, Menara UOA Bangsar achieved the highest occupancy rate of 97.0% among the portfolio properties as at 1Q23. Following closely behind were the two other MD Cybercentre designated buildings, namely the (i) UOA Corporate Tower and Wisma UOA Damansara II, which saw the occupancy rate at 92.0% and 79.0% respectively.

Valuation & Recommendation

• We kept our forecasted earnings at RM61.5m, RM62.1m, and RM63.2m respectively for FY23-25, taking into account the gradual improvement in occupancy rate towards end-FY23, based on the strategic locations of UOAR’s portfolio properties. Meanwhile, we expect the upcoming MD Status of Menara UOA Bangsar will attract more ICT tenants, which will further enhance the occupancy rate of the portfolio.
   
• 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, the group is committed to reward at least 90.0% of the distributable income of the Trust.

• Risks to our recommendation include the slow recovery in rental activities due to the fundamental shift in the way people work under the post-pandemic environment. Besides, the higher borrowing cost and electricity tariff may continue to weigh on UOAR’s margins and overall financial performance moving forward.

Source: Mplus Research - 7 Jun 2023