Sentral REIT’s 9MFY21 core net profit of RM61.7m (+2.2% YoY) was within both ours and consensus estimates. YTD, top line fell (-3.1% YoY) mainly due to lower revenue received from 3 properties in Klang Valley and 1 in Cyberjaya. Lower total expenses (-9.9%) aided the improvement in core net profit (+2.2%). Occupancy remained strong at 91% while gearing dropped slightly to 37%. Maintain our forecasts, reiterate BUY with unchanged TP of RM0.98 based on FY22 DPU on targeted yield 7.9%. We like Sentral REIT for its attractive high dividend yield of 8.5% and resiliency amid Covid-19.

Within expectation. 3QFY21 core net profit of RM22.1m (+17.1% QoQ, +3.0% YoY) brought 9MFY21 core net profit to RM61.7m (+2.2% YoY). The result was within both ours and consensus estimates, accounting for 75%-77% respectively.

Dividend. None as dividend is usually payable semi-annually.

QoQ. Revenue was up by 6.8% mainly thanks to smaller rental rebates provided during the quarter. Lower property operating expenses (-6.3%) incurred for some of the properties and lower administrative expenses (-25.4%) led to the increase in core net profit (+17.1%).

YoY. Top line fell (-3.0%) due to lower revenue generated from QB3-BMW, Plaza Mont Kiara, Wisma Technip and Menara Shell. The decline in property operating expenses (-13.6%) paired with lower expenses (-5.2%) from lower finance costs (-7.2%) offset the drop in revenue. Hence, core net profit improved to RM22.1m (+3.0%).

YTD. Gross revenue reduced (-3.1%) to RM120.0m, owning to the drop in revenue generated from QB3-BMW, Plaza Mont Kiara, Wisma Technip and Platinum Sentral. The decline in property operating expenses (-5.8%) slightly cushioned the fall in NPI (-2.3%). Decline in total expenses (-9.9%) was mainly driven by lower finance costs (-13.5%) on the back of lower interest rates that mitigated the increase in administrative expenses (+15.3%). Thus, core net profit of RM61.7m (+2.2%) was attained.

Occupancy and gearing. With 9 properties, the overall occupancy rate remained stably high at 91%. While gearing level reduced slightly to 37% (2QFY21: 38%) with majority of its borrowings being charged a floating interest rate (56%).

Lease expiry. In 2021, 22% of Sentral REIT's total net lettable area (NLA) or approximately 440k sq. ft. are due for renewal. Approximately 81% of leases due in 3QFY21 have been successfully renewed.

Outlook. Sentral REIT will continue to focus on cost optimisation and tenant retention. We foresee 4Q to register resilient earnings backed by stable occupancy across assets. 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.

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 8.5% (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 - 11 Nov 2021