Summary

• Results in-line. UOAREIT’s 3Q23 core earnings came in at RM14.1m (1.2% QoQ, - 13.1% YoY), brought the 9M23 sum to RM42.1 m (-8.0% YoY), which accounted for 72.6% and 69.5% of ours and consensus estimates and it is considered to be within expectations.

• YoY. During this period, UOAREIT’s core earnings were down 13.1% YoY, mainly contributed by increased property operating expenses such as higher electricity costs and additional rental commissions paid as well as higher borrowing costs.

• Income distribution. No income distribution for the current quarter. YTD, UOAREIT has declared an interim income distribution of 3.96 sen for FY23, ex-date on 7th of Aug.

• Buildings occupancy rate. Besides Wisma UOA Damansara II and UOA Corporate Tower showing a mild decline in building occupancy rate to 75% (from 76%) and 94% (from 96%), respectively, the rest of the properties managed to demonstrate improvements in 3Q23.

• Weighted average lease expiry (WALE) stood at 1.22. As at 3Q23, UOAREIT’s weighted average lease expiry (WALE) stood at 1.22, as compared to 1.33 and 1.08 in FY21 and FY22, respectively. Overall tenancy expiry profile is 13.0 % to 36.6% over 2023-2026.

• Gearing ratio slightly higher. Gearing ratio added 0.9% to 39.9% as at 9M23 versus 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 cautious 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 segment; thus rental rates are expected to be flattish. Overall portfolio occupancy rate stood at 81.0% as at 3Q23 may gradually tick higher, but still below pre-pandemic level of 91.5% in FY19.

Valuation & Recommendation

• Maintained earnings forecast. As the core net profit came in within expectation, we maintained the earnings forecast for FY23-25f.

• HOLD recommendation with RM1.20 TP. We maintained a HOLD recommendation on UOAREIT, with 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.

• Downside risks. 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, should the BNM increase interest rate going forward, the group may incur higher borrowing cost. Also, if there is a hike in electricity tariff, it could weigh on UOAREIT’s margins and overall financial performance moving forward.

Source: Mplus Research - 17 Nov 2023