1QFY23 net profit of RM17.7m (-13% YoY) met expectations.  Earnings outlook remains unexciting amid the persisting supplydemand imbalance of office space. As we roll over our valuation  window to FY24, we keep our TP at RM0.79 after applying an  unchanged target yield of 8.0% (which implies a 3.5% yield spread  above our 10-year MGS yield assumption of 4.5%). Upgrade to  MARKET PERFORM based on total expected return of negative  0.8%.

Results’ highlights. 1QFY23 core net profit of RM17.7m (-13% YoY), which represented 25%/24% of our/consensus full-year forecast, is  within expectations. This comes as gross revenue stood at RM37.5m (- 3% YoY, mainly attributable to reduced income generated from QB2  and Wisma Technip) while property operating expenses dipped 1%  YoY to RM8.2m, which led net property income (NPI) to RM29.3m (-4%  YoY). Gearing ratio inched up to 37.9% in 1QFY23 (from 37.5% in  4QFY22) while finance costs rose 25% YoY to RM9.1m. No income  distribution was declared in 1QFY23 since SENTRAL typically pays  income distribution on a half yearly basis.

Outlook. While its overall portfolio occupancy rate, which was  previously on the decline (from 90% in end-December 2021 to 86% in  end-March 2022, to 78% end-June, and to 73% end-September 2022 before inching back to 77% as of end-December 2022 and end-March  2023), has somewhat stabilised, it may take time for SENTRAL to find  tenants to fill up the existing vacant space against the overhang of  office space and challenging economic backdrops. After achieving a  low renewal rate of 41% (out of the ~511,000 sq ft of net lettable area  (NLA) that were up for renewal) last year, another 162,000 sq ft (or 10%  of NLA) of space are due for renewal in 2023. During the quarter,  SENTRAL has renewed 99% of the leases for 67,500 sq ft of NLA that were due for renewal in 1QFY23.

Earnings update. Post results, we are keeping our net profit forecasts at RM71.3m for FY23 and RM70.8m for FY24. Our corresponding DPU estimates remain at 6.3 sen each for FY23 and FY24, which imply yield of 7.3%.

Upgrade to MARKET PERFORM. As we roll over our valuation window to FY24, we maintain our TP at RM0.79 based on an unchanged target  yield of 8.0% (which is derived from a 3.5% yield spread above our 10- year MGS yield assumption of 4.5%) on our FY24F GDPU. This is to  reflect its high exposure to the office space sector amid the tough  industry dynamics that is still clouded by the persistent supply overhang.  With total expected return of minus 0.8% (comprising share price  downside risk of -8.1% and FY23F yield of 7.3%), we upgrade  SENTRAL to MARKET PERFORM. 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) higher-thanexpected rental reversions, and (iii) oversupply in office space eases,  boosting occupancy and rental rates.

Source: Kenanga Research - 12 May 2023