Summary

• Below expectations. In 4QFY23, UOAREIT registered core earnings of RM11.6m, bringing the core net profit to RM54.6m for FY23. The core net profit was broadly in line with our estimates, accounting to 93.9% but below consensus expectations, accounting to 90.0% of consensus net profit estimates.

• YoY. The core net profit declined 14.0% from RM13.6m to RM11.6m due to (i) lower rental revenue from Wisma UOA II (-8%), Wisma UOA Damansara I (-23%), Wisma UOA Damansara II (-5%), and UOA Corporate Tower (-2%) and higher direct operating expenses across most of the properties under UOAREIT (except Wisma UOA Damansara II) contributed by increased electricity costs and routine lift maintenance.

• QoQ. Core earnings fell 15.4% from RM13.7m to RM11.6m in tandem with the drop in overall rental revenue by 5.2% as well as higher property operating expenses as mentioned above.

• YTD. As compared to FY22, FY23 core PATMI fell 10.2% from RM60.8m to RM54.6m on the back of slight drop in rental revenue and increased property operating expenses due to higher electricity costs across all the properties.

• Dividend. For 4Q23, 3.86 sen income distribution was declared (ex-date: 6th of Feb).

• Buildings occupancy rate. In 4Q23, besides Wisma UOA Damansara II and UOA Corporate Tower recording higher occupancy rate to 78% (from 75%) and 98% (from 94%), respectively, the rest of the properties demonstrate a slowdown or neutral in their respective occupancy rate.

• Gearing ratio increased mildly. Gearing ratio added 0.3% to 39.4% as at FY23 vs. 39.1% in FY22.

• Weighted average lease expiry (WALE) increased to 1.52. As of FY23, UOAREIT’s WALE rose from 1.22 in 3Q23 to 1.52, as compared to 1.33 and 1.08 in FY21 and FY22, respectively. Overall tenancy expiry profile is 2.9% to 36.0% over 2023-2027.

• Outlook. With the office space oversupply situation prolonged, we believe the overall office space outlook may continue to stay on a neutral to downward bias tone going forward. Also, we opine that the overall portfolio occupancy rate may continue to range around 81-85%, but should stay below the pre-pandemic level of 91.5% in FY19.

Valuation & Recommendation

• Maintained earnings forecast. As the core net profit came in broadly within expectation, we maintained the earnings forecast for FY24f-25f.

• HOLD recommendation. We maintained a HOLD recommendation on UOAREIT, with higher target price of RM1.21 as we roll over to FY24. The target price is derived by ascribing a P/E of 14.0x to FY24f EPS of 8.67 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 further hike in electricity tariff, it could weigh on UOAREIT’s margins and overall financial performance moving forward.

Source: Mplus Research - 23 Jan 2024