Sentral REIT’s 1QFY22 net profit of RM20.4m (+6.9% QoQ, -1.6% YoY) was within both ours and consensus estimates. No dividends were declared. Top line fell (- 4.2% YoY) mainly due to lower contribution from Wisma Technip, Menara Shell, and QB3-BMW. That said, lower finance costs (-5.0% YoY) cushioned the decline in core net profit of RM20.4m (-1.6% YoY). Overall, occupancy rate reduced to 86%, while gearing increased slightly to 37.4%. We updated our model to incorporate FY21 audited accounts and thus, FY22-23 profit forecast ticked up by 2%-3%. Also, we introduced FY24 estimates. Post book keeping, our TP increases to RM1.00 (from RM0.95), based on FY23 DPU on targeted yield 8.3%. Maintain BUY.

Within expectation. 1QFY22 net profit of RM20.4m (+6.9% QoQ, -1.6% YoY) was within both ours and consensus full year estimates at 24%.

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

QoQ. Top line fell (-3.2%) to RM39.3m mainly due to lower contribution from Wisma Technip, and Menara Shell. That said, lower property operating expenses (-23.0%) were incurred for some of the properties, leading to the improvement in net property income (NPI) by +3.8%. Besides, we noticed that finance costs were lower (-7.8%) due to savings on interests after refinancing exercise in Mar 2022. As such, net profit increased to RM20.4m (+6.9%).

YoY. Revenue reduced (-4.2%) due to lower contribution from Wisma Technip, Menara Shell and QB3-BMW. However, the decline in property operating expenses (- 14.2%) slightly cushioned the fall in NPI (-1.2%). Moving on, total expenses was flattish (-0.6%) due to (i) lower finance costs (-5.0%), thanks to smaller interest on borrowings after the completion of refinancing exercise in Mar 2022 but (ii) dragged by higher administrative expenses (+>100%). Hence, net profit of RM20.4m (-1.6%) was attained.

Occupancy and gearing. With nine properties, the overall occupancy rate decreased to 86% (FY21: 90%). As for gearing level, it increased slightly to 37.4% (FY21: 36.9%).

Outlook. Sentral REIT successfully recorded a retention rate of 56% for leases due in 1QFY22. That said, Sentral REIT has initiated early renewal negotiations for some expiring tenancies due in 2QFY22 and 3QFY22, which is in line with its main focus on tenant retention, in order to maintain stable occupancy and healthy weighted average lease expiry (WALE) for its portfolio of assets.

Forecast. We updated our model for FY21 audited accounts and in turn, our FY22-23 forecasts increased slightly by 2%-3%. We also introduce FY24 forecasts.

Maintain BUY, TP: RM1.00. Post book keeping, our TP increases to RM1.00 (from RM0.95). Our TP is based on FY23 forward DPU on targeted yield of 8.3%, 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 8.2% (highest among REITs in our universe).

Source: Hong Leong Investment Bank Research - 13 May 2022