• Maintain NEUTRAL, new MYR0.87 TP from MYR0.89, 5% upside with c.8% yield. Sentral REIT’s 9M23 results are in line with expectations, as revenue growth from improved occupancy and positive rental reversion was offset by higher utility and financing costs. The REIT signed a new tenancy for Sentral Building 4 (SB4) (formerly known as Quill Building 2) in August, thus increasing its portfolio occupancy to 86% from 77%. Rental contribution should begin in 1Q24 after a rental-free period.

• Results in line. The REIT’s 3Q23 net profit of MYR18.2m (+3% QoQ, flat YoY) brought 9M23 earnings to MYR53.5m (-6% YoY) – at 76% and 75% of ours and consensus’ full-year estimates. In the quarter, the REIT’s revenue growth from Platinum Sentral, Menara Shell, and Sentral Building 3 was able to offset the 33% higher operating expenses (mainly due to utility costs) and 19% higher finance costs (average cost of debt: 4.4%), leading to a flattish core profit YoY. However, on a YTD comparison, the rental contribution in 1H22 from Sentral Building 4 and Wisma Sentral Inai (formerly known as Wisma Technip FMC) before the buildings were vacated, led to the 6% decrease YoY.

• Improved occupancy rate. In August, the REIT secured a tenant for the entirety of SB4. Reminder that the building had been left vacant since May 2022 following the expiry of its previous tenancy. Following a rental-free period, we expect rental contribution to begin in Jan 2024. The REIT’s portfolio occupancy has now improved to 86% from 77% in the previous quarter, with only Sentral Building 3 (6% of portfolio NLA) and Wisma Sentral Inai (11% of portfolio NLA) having occupancy rates below 90%. In FY24, the REIT has 13% of its NLA up for renewal. Although we forsee minimal downside risks to occupancy as most of the expiring leases are from the REIT’s premium assets, we are cautious of the risk of rental reversion turning negative as the office market remains challenging.

• We increase our FY24-25F earnings by 8% and 5% after adjusting our occupancy rate assumptions, but our TP is lowered to MYR0.87 as we adjusted our long-term rental reversion assumption downwards. Any disposal opportunities for the vacant Wisma Sentral Inai provides a strong re-rating catalyst. We have yet to input any contribution from Menara CelcomDigi as we await the completion of the acquisition. Our TP has a 0% ESG premium applied. The key downside risk to our outlook is the oversupply of office properties in the market affecting the REIT’s occupancy and rental rates. Upside risk is better-than-expected rental reversions.

Source: RHB Securities Research - 10 Nov 2023