Sentral REIT’s 1QFY21 core net profit of RM20.7m (+0.4% QoQ, +4.6% YoY) was within both ours and consensus estimates. No dividends were declared. Top line remained flat (-1.6% YoY). Lower finance costs (-19.5% YoY) pushed up core net profit to RM20.7m (+4.6% YoY). Overall occupancy is stable at 89%, while gearing increased to 38.3%. We updated our model for FY20 audited accounts which led to our FY21-22 earnings increase by 3%-4%. We also introduced FY23 estimates. Post book keeping, our TP increases to RM0.98 (from RM0.94), based on FY22 DPU on targeted yield 7.9%. Maintain BUY.

Within expectation. 1QFY21 core net profit of RM20.7m (+0.4% QoQ, +4.6% YoY) was within both ours and consensus full year estimates at 26%.

Dividend. No dividends were declared as it is usually payable semi-annually.

QoQ. Top line remained flat (-1.8%) at RM41.0m. Lower property operating expenses (-4.1%) on some of the properties as well as lower finance costs (-10.5%) incurred during the quarter. This followed with core net profit of RM20.7m (+0.4%).

YoY. Gross revenue continued to be flat (-1.6%); while we understand some properties had recorded higher revenues, this was offset by lower revenue from Plaza Mont Kiara, QB3-BMW and Wisma Technip. Property operating expenses increased slightly (+2.1%) due to higher expenses incurred on some properties. Total expenses reduced (-14.3%) mainly driven by lower finance costs (-19.5%) on the back of lower interest rates. This pushed up core net profit to RM20.7m (+4.6%).

Occupancy and gearing. With 9 properties, the overall occupancy rate remained stable at 89% (4Q20: 90%). As for gearing level, it increased to 38.3% (4Q20: 37.9%) with a majority of its total borrowings being charged a floating interest rate (54%).

Lease expiry. In 2021, 22% of Sentral REIT's total net lettable area (NLA) or approximately 440k sq. ft. are due for renewal. Approximately 96% of leases due in 1Q21 have been successfully renewed. Sentral REIT is negotiating for the balance of the leases with the intention to lock in the tenancy ahead of its expiry and we believe chances of tenancy renewal are high due to nature of business of their tenants (big corporations and multinational companies like Shell, HSBC, DHL, etc).

Outlook. Sentral REIT will be focusing on cost optimisation and tenant retention to overcome the challenging environment that stems from Covid-19 pandemic. Furthermore, we believe Sentral REIT is relatively shielded from Covid-19 headwinds and MCOs impact due to its large exposure of office and miniscule exposure to the retail segment (unlike retail and hotel based REITs).

Forecast. We updated our model for FY20 audited accounts and our FY21-22 forecasts increased slightly by 3%-4%. We also introduce FY23 forecasts.

Maintain BUY, TP: RM0.98. Post book keeping, out TP increases to RM0.98 (from RM0.94). Out TP is based on FY22 forward DPU on targeted yield of 7.9%, which is derived from 2 years historical average yield spread of Sentral REIT and 10-year MGS. Maintain BUY. We like Sentral REIT for its attractive dividend yield of 8.5% (highest among REITs in our universe), and its relatively more resilient earnings amid Covid -19 given minimal retail exposure unlike mall REITs.

Source: Hong Leong Investment Bank Research - 7 May 2021