Sentral REIT’s FY22 core net profit of RM73.6m (-7.6% YoY) was slightly below ours (94.8%) but within street estimates (101.8%). The drop in FY22 performance was mainly due to departure of key tenants from Wisma Technip and QB2 starting from 2Q22, which pressured occupancy levels and rental contribution. Overall occupancy rate increased to 77% (3Q22: 73%). The office market is expected to remain choppy in FY23 due to the office space glut which pressures occupancy and rental rates. This along with the continued vacant QB2 and Wisma Technip, we expect Sentral REIT’s performance to remain soft, although we think the occupancy level has already bottomed out and should trend higher as the management renews its 8% NLA in 2023.

Marginal miss. Sentral REIT’s 4QFY22 core net profit of RM16.6m (-8.9% QoQ, - 12.9% YoY) brought FY22 core earnings to RM73.6m (-8.8% YoY). We deem the results to be marginally below our expectations (94.8%) but within street estimates (101.8%). The shortfall was due to lower than expected rental income and higher finance costs. Core net profit was arrived after excluding RM23.9m fair value loss of its properties.

Dividend. Declared DPS of 3.42 sen (FY22: 6.82 sen vs FY21: 7.41 sen)

QoQ. Revenue was up slightly (+1.9%) to RM36.6m due to improvement in portfolio occupancy rate. Dragged by the increase in property opex (+17.2%), NPI fell 2.0% to RM28.1m. Further hit by higher finance costs +15.4%, core bottom line shrunk -8.9%.

YoY/YTD. Top line was down (-9.8% YoY, -7.3% YTD), attributed to lower revenue from Wisma Technip, QB2-HSBC; partially offset by higher revenue from Plaza Mont Kiara, Menara Shell and Platinum Sentral. NPI dropped at a slower clip (-6.1% YoY, -6.0% YTD) as the revenue shortfall was slightly negated by moderating opex (-20.3% YoY, -11.6% YTD). Accounting for the flattish total expenditure, bottom line reduced (-12.9% YoY, -8.8% YTD).

Occupancy and gearing. With nine properties, the overall occupancy rate reverted to 77% (3QFY22: 73%). As for gearing level, it remained at 37.5%.

Outlook. The office market still remains choppy moving into FY23 due to the office space glut which drags the industry’s occupancy and rental rates. As such, we expect Sentral REIT’s performance to remain soft, at least in the near term due to anticipated flattish reversion for its tenancy renewal. Furthermore, we gathered from the management that QB2-HSBC and Wisma Technip still remains vacant with no potential tenants in sight yet. On a positive note, we think the portfolio occupancy rate has already bottomed out in 2022 as management is confident to achieve full renewal of the 8% expiring NLA in 2023.

Forecast. We cut our FY23/24 forecasts by -1.9%/-4.8% to account for lower rental rate input in view of the challenging outlook, but maintain our occupancy rate assumptions as we believe it should reverse upward on a slow pace moving forward.

Maintain HOLD, TP: RM0.87. We maintain our HOLD call but decrease our TP to RM0.87 (from RM0.88). Our TP is based on FY23 forward DPU on targeted yield of 8.6%, which is derived from 5-year historical average yield spread between Sentral REIT and 10-Year MGS. We believe the downside should be cushioned for Sentral REIT due to its attractive dividend yield at around 8% and prime office properties at strategic locations.

Source: Hong Leong Investment Bank Research - 20 Jan 2023