We derive a fair value of RM1.39 for UOA REIT based on FY21 forward DPU on targeted yield of 6.6%, implying a 15.8% upside. UOA REIT’s earnings and prospects appear solid especially after their recent acquisition plan of UOA Corporate Tower, which is yield accretive. Overall occupancy remains healthy at 92% and the company has a strong record for dividend payout (>95%). We like UOA REIT for its attractive dividend yield of 7.0-7.6% and its relatively more resilient earnings amid Covid-19 given minimal retail exposure unlike other mall based REITs.

Acquisition of UOA Corporate Tower. We view positively the acquisition of UOA Corporate Tower as it is yield accretive (c.6.3% of NPI yield vs its current portfolio NPI yield of 5.2%). We estimate that FY21’s earnings will increase by 65% YoY from full year contribution of the UOA Corporate Tower which will add RM44.4m revenue contribution (56.4% of FY19 revenue). The property has a strong occupancy rate of 93.1% and is situated in a prime location (Bangsar South) which will provide resilient demand. We believe this acquisition is a good move by management as its contribution will boost portfolio earnings significantly and enhance its sustainable income stream.

Placement will not cause dilution. Management is proposing a placement exercise to raise gross proceeds of up to RM280m which will be solely used to fund the balance purchase consideration of UOA Corporate Tower and expenses related to the placement. Although placement exercises typically have been known to cause DPU dilution, this may not be the case for UOA REIT as the acquired property will significantly increase the earnings of the company as well as its DPU. We estimate that DPU will increase by 8.2% in FY21 even after incorporating high er base from the placement exercise.

Strategically located assets ensure resilient demand. All of UOA REIT’s assets are located in prominent locations in Kuala Lumpur with good connectivity to public transport links. We believe UOA REIT’s strategically located assets as well as its proximity to public transportation augurs well for occupancy, tenant retaining and rental rates. Also, current portfolio occupancy remains strong at 92%.

Relatively safer. In the wake of Covid-19 pandemic, we have seen that most REITs (especially the retail and hospitality REIT) were badly affected as most retailers/hoteliers were closed during the MCO, hence impacting DPU. We are of the view that UOA REIT is a safer haven vis-a-vis other retail and hospitality REITs as the office segment is less exposed to the pandemic (i.e. minimal rental assistance needed).

Strong track record of dividend payout. UOA REIT has consistently paid out >95% of its distributable income from FY15-19, translating to an average yield of 7.9% over the past 5 years. This is more attractive than general board FD rates offered by banks (<2% currently). For FY20-21, we forecast UOA REIT to give out 8.5 and 9.2 sen DPU respectively, which translates into 7.0-7.6% yield.

Fair value of RM1.39. We derive a fair value of RM1.39 based on FY21 forward DPU on targeted yield of 6.6%, suggesting a 15.8% return. Our targeted yield of 6.6% is derived from its 2 years historical average yield spread of UOA REIT and 10-year MGS. We like UOA REIT for its attractive dividend yield of 7.0-7.6% and its relatively more resilient earnings amid Covid-19 given minimal retail exposure unlike other mall based REITs.

Source: Hong Leong Investment Bank Research - 28 Oct 2020