9MFY22 net profit of RM57.0m (-13% YoY) is within expectations. The weaker performance was mainly attributed to lower topline contribution. No distribution was declared, as expected. Our forward earnings are maintained. Still an UNDERPERFORM with an unchanged TP of RM0.79 based on a target yield of 8.0% (which implies a 3.5% yield spread above our 10-year MGS assumption of 4.5%).

Results’ highlights. YoY, gross revenue was down 7% to RM111.0m, which led net profit to decline by 13% to RM57.0m (as a gain on divestment of investment property of RM3.8m was recognised in 9MFY21). This represents 78%/80% of our/consensus estimates – broadly within our expectation and a tad above consensus – as we anticipate a marginally softer final quarter. The fall in revenue was mainly due to lower contributions from Wisma Technip, QB2-HSBC and QB3-BMW. Net property income (NPI) dropped in tandem by 7% to RM86.9m as property operating expenses dipped 8% to RM24.1m. There was no distribution declared in 3QFY22 (as SENTRAL typically pays distribution on a semi-annual basis).

Outlook. The prevailing industry oversupply of office space will continue to weigh on SENTRAL’s earnings. Reflecting this, overall portfolio occupancy rate has been on the decline from 90% in end-December 2021, to 86% in end-March 2022, to 78% end-June, and down further to 73% end-September this year. Against this backdrop, approximately 511,000 sq ft or 28% of total committed net lettable area (NLA) is due for renewal this year. As of end-September 2022, 11% has been renewed while another 16% was not renewed (mainly from Quill Building 2 and Wisma Technip) with negotiations for the balance 1% currently in progress for renewal in 4QFY22.

Earnings maintained. Post the results, we are keeping our net profit projections at RM73.2m for FY22 and RM71.3m for FY23. Our FY22F and FY23F DPU remain at 6.5 sen and 6.3 sen, respectively, which imply yields of 7.4% and 7.2%.

Still an UNDERPERFORM. Its share price has fallen 12.9% since our downgrade on 22 August 2022 amid the poor fundamentals. We are keeping our TP at RM0.79 based on a target yield of 8.0% (which is derived from a 3.5% yield spread above our 10-year MGS assumption of 4.5%) on FY23F GDPU. This is to take into consideration SENTRAL’s high exposure to the office space sector (which is expected to be affected by the persistent oversupply situation amid an uncertain economic environment). There is no adjustment to our TP based on ESG of 3-star rating as appraised by us.

Risks to our call include: (i) risk-free rate eases, (ii) higherthan-expected rental reversions, and (iii) oversupply in office space eases, boosting occupancy and rental rates.

Source: Kenanga Research - 11 Nov 2022