Sentral REIT’s 1HFY21 core net profit of RM39.6m (+1.8% YoY) was within both ours and consensus estimates. Dividend of 3.43 sen per unit was declared. Top line fell (-3.2% YoY) mainly due to lower revenue received from 3 properties in Klang Valley and 1 in Cyberjaya. Lower total expenses (-12.1%) aided the slight increase in core net profit (+1.8% YoY). Occupancy increased to 91.7% while gearing dropped slightly to 37.9%. Maintain our forecasts, reiterate BUY with unchanged TP of RM0.98 based on based on FY22 DPU on targeted yield 7.9%. We like Sentral REIT for its attractive high dividend yield of 8.4% and resiliency amid Covid-19 given majority office exposure in its portfolio.

Within expectation. 2QFY21 core net profit of RM18.9m (-8.7% QoQ, -1.0% YoY) brought 1HFY21 core net profit to RM39.6m (+1.8% YoY). Core net profit is attained after removing gain on disposal of investment property of RM3.8m. The result was within both ours and consensus estimates, accounting for 48%-49% respectively.

Dividend. Declared semi-annual dividend of 3.43 sen per unit (2QFY20: 3.43 sen) going ex on 20 Aug 2021.

QoQ. Revenue reduced (-6.9%) to RM38.2m mainly due to rental rebates given to Platinum Sentral, Plaza Mont Kiara, and Menara Shell. Lower property operating expenses (-10.7%) was incurred for some of the properties. This followed with lower core net profit of RM18.9m (-8.7%), inline with lower top line.

YoY. Gross revenue fell (-4.8%) owing to lower revenue generated from Platinum Sentral, Plaza Mont Kiara, QB3-BMW and Wisma Technip. The decline in property operating expenses by 6.1% and lower total expenses (-9.8%) from lower finance cost (-13.0%), mitigated the drop in revenue and core net profit was flattish (-1.0%).

YTD. Top line fell (-3.2%) to RM79.2m mainly due to the drop in revenue generated from 4 properties mentioned above. Reduction in total expenses (-12.1%) was mainly driven by lower finance costs (-16.4%) on the back of lower interest rates. Thus core net profit of RM39.6m (+1.8%) was attained.

Occupancy and gearing. With 9 properties, the overall occupancy rate increased to 91.7% (1QFY21:89%). While gearing level reduced slightly to 37.9% (1QFY21: 38.3%) with majority of its 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 73% of leases due in 1HFY21 have been successfully renewed.

Outlook. Sentral REIT will be focusing on cost optimisation and tenant retention to overcome the challenging environment that stems from the Covid-19 pandemic. Furthermore, we believe Sentral REIT is relatively shielded from Covid-19 impact due to its large exposure to office (88% of portfolio), and miniscule exposure to retail unlike the other mall based REITs. Hence, we feel Sentral REIT will continue to register resilient earnings in 2H.

Forecast. Maintain as the Results Were in Line.

Maintain BUY, TP: RM0.98. Maintain BUY with unchanged TP of RM0.98. Our 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. We like Sentral REIT for its attractive dividend yield of 8.4% (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 - 6 Aug 2021