• Still NEUTRAL, new MYR0.92 TP from MYR0.94, 3% upside with c.7% FY23 yield. FY22’s results are in line with expectations, with Sentral REIT recording a YoY decline in revenue and earnings due to the lack of contributions from the vacant Wisma Technip and QB2 buildings. While we believe further downside risks to occupancy are limited, with just 8% of NLA due for renewal in FY23, we do expect rental reversions to remain flat as management focuses on improving the occupancy rate.

• Results in line. 4Q22’s net profit of MYR16.6m (-8.8% QoQ, -12.7% YoY) brought FY22 earnings to MYR73.6m (-12.9% YoY) – in line with expectations at 98% and 102% of our and consensus’ estimates. On a YoY basis, FY22 revenue declined by 7.3% due to lower occupancy rates, but net property income only declined by 6% thanks to better cost efficiencies. A DPU of 3.42 sen was declared in this quarter, bringing full-year DPU to 6.82 sen (FY21: 7.41 sen), which translates to a yield of 7.6% based on the year-end closing price.

• Occupancy rate up to 77%. Sentral REIT’s blended occupancy rate improved to 77% in 4Q22 from 3Q22’s 73% thanks to new tenancies at Platinum Sentral. In FY22, the REIT only managed to renew 12% out of the total 28% of NLA due for renewal in 2022. However, with just 8% of NLA up for renewal in FY23 – and most comprising stronger assets such as Platinum Sentral and Menara Shell – the pressure on occupancy rates should ease slightly, in our view. However, as rental rates are already competitive, we believe reversions will be flattish to low single-digit positive.

• Limited guidance on the vacant buildings. Having been vacant since 2Q22, management continues to explore options for Wisma Technip and QB2, be it securing new tenants or divestment opportunities. Recall: QB5 was previously disposed of in 2Q21 after remaining vacant for more than a year. We are wary of the situation continuing to drag out due to the current challenging supply-demand dynamics.

• We lower our FY23F-24F earnings by 5% after making some housekeeping adjustments, and introduce our FY25F net profit of MYR76.1m. Our new TP has a 0% ESG premium applied, as Sentral REIT’s ESG score of 3.0 is in line with the country median.

• The key downside risk would be the oversupply of office properties in the market affecting the REIT’s occupancy and rental rates. Upside risks are higher-than-expected demand for office spaces and inorganic growth opportunities.

Source: RHB Research - 20 Jan 2023