Summary

• Below expectation. UOAREIT’s 2Q23 core earnings came in at RM13.9m (-2.1% QoQ, -8.9% YoY), brought the 6M23 sum to RM28.1m (-8.0% YoY), which accounted for 45.6% and 42.7% of ours and consensus estimates. The results were deemed below expectations and key deviations include (i) the lower occupancy rate in Wisma UOA II and Wisma UOA Damansara II, (ii) higher expenditure arising from high electricity costs, repair and maintenance expenses and borrowing costs.

• YoY. Most of UOAREIT’s properties managed to demonstrate a YoY improvement in occupancy rates, with the exception of Wisma UOA II. During this period, UOAREIT’s core earnings were down 8.9% YoY, mainly impacted by higher than expected total expenditure amid the abovementioned factors.

• Income distribution. UOAREIT has declared an interim income distribution of 3.96 sen for FY23, ex-date on 7th of Aug.

• Weighted average lease expiry (WALE) stood at 1.30. As at 2Q23, UOAREIT’s weighted average lease expiry (WALE) stood at 1.30, as compared to 1.33 and 1.08 in FY21 and FY22, respectively. Overall tenancy expiry profile is 11.3% to 38.3% over 2023-2026.

• Gearing ratio marginally higher. Gearing ratio added 0.1% to 39.2% in 6M23 as compared to 39.1% in FY22. We expect the borrowing cost will increase after Bank Negara Malaysia raised the overnight policy rate (OPR) to 3.00% in May-2023.

• Outlook. We remained cautiously optimistic on the office space outlook as market sentiment remained soft amid uncertainties arising from elevated inflation, future interest rate hikes as well as oversupply conditions in the office space; thus rental rates are expected to be flattish. Overall portfolio occupancy rate stood at 80.8% as at 2Q23 may gradually tick higher, but still below pre-pandemic level of 91.5% in FY19.

Valuation & Recommendation

• As the core net profit came in below expectations, we cut the earnings by 5.6-6.4% to RM58.1m, RM58.6m and RM59.2m, respectively for FY23f-FY25f taking into higher property expenses and borrowing costs.

• We downgrade from to HOLD (from BUY) recommendation on UOAREIT, with lower target price of RM1.20. The target price is derived by ascribing a P/E of 14.0x to FY23f EPS of 8.6 sen. The group is committed to reward at least 90.0% of the distributable income of the Trust.

• Risks to our recommendation include the slower-than-expected recovery in the rental activities due to the shift of working method post pandemic environment. Besides, the higher borrowing cost and electricity tariff may continue to weigh on UOAREIT’s margins and overall financial performance moving forward.

Source: Mplus Research - 25 Jul 2023