• U/G to BUY from Neutral, new DDM-derived MYR0.91 TP from MYR0.87, 15% upside and c.9% yield. FY23 results came in line with expectations, with a strong 4Q to end what had been a challenging year. We are upgrading our call as we expect earnings to improve from Sentral REIT’s higher occupancy rates. Downside risks should also be minimal going forward, with only 13% of NLA up for renewal. Additionally, the dividend yield of 9% is the highest among M-REITs under our coverage.

• Results in line. 4Q23 net profit of MYR19.2m (+5.6% QoQ, +15.7% YoY) brought FY23 earnings to MYR72.7m (-1.2% YoY), ie in line with expectations at 103% and 100% of our and Street’s estimates. During the quarter, revenue improved 22% YoY, mainly due to higher income from Platinum Sentral, Menara Shell, and the newly acquired Menara CelcomDigi. This helped offset the 21.8% higher utilities expenses YoY, hence, allowing the REIT to maintain a stable 76.8% net property income or NPI margin (4Q22: 76.7%). On a full-year basis, earnings were 1.2% lower YoY due to lower occupancy rates in 1H23. Sentral REIT’s FY23 DPU of 6.68 sen is 2% lower than FY22’s 6.82 sen.

• Occupancy rates improved to 89%, a stark improvement from the low of 77% from 2H22 to 1H23 (3Q23: 86%) after securing a new tenant for Sentral Building 4 or SB4 and the acquisition of Menara CelcomDigi. We think that downside risks to occupancy rates are limited. In FY24, only 13% of the total NLA is up for renewal, and these comprise the REIT’s stronger assets, eg Platinum Sentral and Menara Shell. However, we expect rental reversions to remain flattish amid the challenging office market.

• Gearing level is at 45% following the Menara CelcomDigi acquisition, ie close to the 50% gearing limit imposed by the Securities Commission. We think any disposal opportunity for Wisma Sentral Inai, which is approaching two years since being left vacant, will be a strong re-rating catalyst for the REIT. The property is valued at MYR154m (6% of Sentral REIT’s asset value), which – if used to repay borrowings – could reduce the REIT’s gearing ratio to 41%.

• Earnings forecast. We increase our FY24F-25F earnings by 11% after incorporating the contributions from the abovementioned acquisition. We also introduce our FY26F earnings of MYR91m. Our TP has a 0% ESG premium/discount applied, as the 3.0 ESG score is in line with the country median.

• The key downside risk to our outlook is the oversupply of the office properties in the market, which are affecting the REIT’s occupancy and rental rates.

Source: RHB Securities Research - 24 Jan 2024