Summary

• To recap, UOAREIT recorded 2Q24 core PAT of RM8.1m (-30.6% QoQ, -41.7% YoY), bringing the 6M24 core PAT to RM19.8m (-29.6% YoY), which is below the expectations, accounting to 40.2% and 33.7% of ours and consensus estimates. Also, we have made a conference call with UOAREIT to get some updates.

• Menara UOA Bangsar. The departure of the anchor tenant in Menara UOA Bangsar (8 floors) will be filled by new tenants. Four floors are rented out, two floors are waiting for confirmation, and two floors will be subdivided to provide more options for future tenants. We understand that another GLC tenant (3 floors) will be leaving, hence the overall occupancy rate is expected to be around 70-80% for the rest of FY24. The sinking fund that was incurred is used for the chiller plants, providing savings on electricity with a payback period of approximately 6 years.

• Menara UOA Centre and UOA II. According to UOAREIT, these properties will be having some upgrades in the future, although the timeline is uncertain. Thus, there will be another round of sinking fund, which will be staggered over 6-12 months.

• Outlook. UOAREIT commented that there are more inquiries about their office space, with potential tenants looking for fitted offices without the need to invest capital for renovation/refurbishment. However, we understand the office space market is likely to remain cautious even after the Covid-19 pandemic, as corporates will need to provide flexibility for employees in a hybrid work structure. Thus, going forward, rental rates are expected to remain flat at least in the near term.

Valuation & Recommendation

• Forecast. Maintained with RM39.1-44.0m core PAT for FY24-25f.

• SELL recommendation with RM0.93 TP. We have a SELL recommendation on UOAREIT with a TP of RM0.93. The target price is derived by ascribing a P/E of 14.0x to FY25f EPS of 6.64 sen as we roll over to FY25f earnings. The group is committed to reward at least 90.0% of the distributable income.

• Downside risks. Risks to our recommendation include the slower-than-expected pick up in occupancy rate in Menara UOA Bangsar. 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 - 5 Aug 2024