UOA REIT’s 1QFY22 core net profit of RM15.9m (+7.3% QoQ, -1.6% YoY) was within our full year estimates. During the quarter, revenue fell slightly (-1.3% YoY) due to the decline in occupancy in some older assets. In turn, this coupled with the marginally higher property opex (+0.9% YoY) led to the decline in NPI (-2.1% YoY). However, lower other expenses (-2.0%) mitigated the overall fall in core net profit (-1.6% YoY). We updated our model for FY21 audited accounts and bumped up FY22-23 profit by 3%-2%. We also introduce FY24 estimates. To keep abreast with the current MGS 10-year yield, we prudently increase our MGS assumption to 4.25% (from 3.75%). Post book keeping, and rolling forward our valuation to FY23, our TP increases to RM1.15 (from RM1.14), based on FY23 DPU on targeted yield 8.4%. Maintain HOLD.

Within expectations. 1QFY22 core net profit of RM15.9m (+7.3% QoQ, -1.6% YoY) was derived after excluding impairment losses (-RM0.4m). The results came in within our full year expectations at 25.5%. Dividend. None as dividend is usually payable semi-annually.

QoQ. Gross revenue improved to RM29.1m (+3.8%) thanks to lower rebates given out during the quarter. Property opex increase slightly (+1.8%) due to higher maintenances where buildings resumed full operations. That said, total expenses reduced 2.3% with the aid of lower manager’s fee (-1.7%), trustee’s fee (-1.7%) and borrowing costs (- 1.9%). As such, core net profit grew at a faster pace of 7.3% to RM15.9m.

YoY. Revenue fell slightly (-1.3%) due to the decline in occupancy rates in the older buildings. This coupled with the marginally higher property opex (+0.9%) from higher maintenance costs incurred, led to the decline in net property income (NPI) of RM22.2m (-2.1%). However, total other expenses was lower (-2.0%) mainly due to the decrease in administrative expenses (-49.5%; acquisition expenses incurred SPLY), which in turn mitigated the fall in core net profit (-1.6%).

Occupancy and gearing. With 6 properties, the average portfolio occupancy decreased to 79% (FY21: 82%). Gearing increased slightly to 40.2% (FY21: 39.4%).

Outlook. Despite the resumption of economic activities and reopening of national borders, we expect earnings to remain stable for UOA REIT given minimal retail exposure unlike mall based REITs. Besides, UOA REIT will be focussing on prudent capital management and enhancing the performance of its properties.

Forecast. We updated our model for FY21 audited accounts and our FY22-23 earnings were increased by 3%-2%. Also, we introduced FY24 forecasts.

Maintain HOLD, TP: RM1.15. To keep abreast with the current MGS 10-year yield, we conservatively increase our MGS assumption to 4.25% (from 3.75%). Post book earnings adjustments, and rolling forward our valuation to FY23, our TP is raised marginally to RM1.15 (from RM1.14). Our TP is based on FY23 DPU on targeted yield of 8.4%, derived from 2-year historical average yield spread between UOA REIT and MAG10YR. Maintain HOLD.

Source: Hong Leong Investment Bank Research - 20 May 2022