1QFY22 RNI of RM20.4m came in within our and consensus’ expectation at 25% each. No dividend, as expected. Maintain FY22-23E CNP of RM82.4-83.0m on minimal lease expiries and flattish organic growth. However, we remain cautious of the office segment over the long run given oversupply concerns. Maintain MARKET PERFORM and lower TP to RM0.870 (from RM0.900) on a higher 10-year MGS target of 4.4% (from 3.9%).

1QFY22 realised net income (RNI) of RM20.4m came in within our and consensus’ expectation at 25% each. No dividends, as expected.

Results’ highlights. YoY, top-line was down slightly by 4.2% due to lower revenue from Wisma Technip, Menara Shell and QB3-BMW. However, RNI was only down by 1.6% on lower property operating cost (-14%) and lower financing cost (-5%). QoQ, top-line was down by 3.2% likely due to similar reasons mentioned above but RNI increased by 7% on lower property operating cost (-23%), lower finance cost (- 7.8%) and lower expenditure (-2.8%). Gearing remained stable at 0.37x.

Outlook. FY22-23 will see minimal lease expiries of 28-8% of net lettable assets (NLA) while the issue of oversupply of office spaces in the Klang Valley remains. The Group’s portfolio occupancy declined slightly to 86% (from 90%). We believe that SENTRAL REIT would be able to at least see flattish organic growth. The group remains diligent in managing cash-flows and exercising financial discipline, and is on the lookout for accretive acquisition should the opportunity arise given its healthy balance sheet.

Maintain FY22-23E CNP of RM82.4-83.0m. Earnings are driven by flattish organic growth and occupancy of 88-90%. Our FY22-23E GDPU/NDPU of 7.2-7.2 sen / 6.5-6.5 sen imply attractive gross yield of 7.5% each (net yield of 6.8%).

Maintain MARKET PERFORM but on a lower TP to RM0.870 (from RM0.900). Our TP is lowered post rolling forward valuation base to FY23E GDPU of 7.2 sen and 3.9ppt spread, but on a higher 10-year MGS target of 4.4% (from 3.9%) in line with our in-house estimates. We favour SENTRAL REIT for its resilient earnings which have remained stable throughout the pandemic. However, we are cautious on the office segment’s long-term prospects given the oversupply situation in the Klang Valley and viable work-from-home arrangements which may decrease demand for office spaces - already factored in our valuations.

Risks to our call include bond yield expansions or contractions, and weaker or stronger-than-expected rental reversions.

Source: Kenanga Research - 13 May 2022