Investment Highlights

• We downgraded UOA REIT to HOLD from BUY with a lower fair value (FV) of RM1.08/unit (from RM1.23/unit previously) based on our revised dividend discount model (DDM). Our FV has incorporated a neutral 3-star ESG rating and implies a FY25F distribution yield of 7%, at parity with its 5-year median.

• The lower FV stems from the cut to FY24F/FY25F/FY26F distributable income by 13%/11%/11% to reflect lower-than- expected occupancy rate for Menara UOA Bangsar.

• UOA REIT’s 1QFY24 distributable income of RM12mil was slightly below expectation, making up 20% of our earlier forecast and street’s. The variance was mainly due to lower- than-expected occupancy rate for Menara UOA Bangsar.

• In 1QFY24, UOA REIT’s gross revenue fell 9% YoY while net property income (NPI) declined 13% YoY. These were mainly attributed to a drop in the occupancy rate in Menara UOA Bangsar to 57% in 1QFY24 from 97% in 1QFY23, as a result of the departure of an anchor tenant.

• QoQ, UOA REIT’s gross revenue decreased 3% while NPI slid 2%. These were mainly attributed to a drop in the occupancy rate in Menara UOA Bangsar to 57% in 1QFY24 from 97% in 4QFY23.

• For reference, Menara UOA Bangsar accounted for 21% of UOA REIT’s FY23 gross rental income. Based on our sensitivity analysis, a 40% drop in occupancy rate for Menara UOA Bangsar will result in a 9% decline in UOA REIT’s revenue.

• Despite the substantial decline, we believe the occupancy rate in Menara UOA Bangsar will recover gradually given its prime location with direct connectivity to Bangsar LRT station.

• Meanwhile, Menara UOA Bangsar is in preparation for theapplication of Malaysia Digital Cybercentre designationwith enhanced infrastructure, which will appeal to a broadertenant base, including information and communicationtechnology companies.

• QoQ, UOA REIT’s average overall occupancy rate reduced to 75% in 1QFY24 from 81% in 4QFY23 .

• Notably, UOA Corporate Tower, a key contributor to UOAREIT (accounting for 46% of NPI in FY23) achieved a remarkable occupancy of 99% in 1QFY24. We recognise that a significant portion of UOAREIT’s tenants with expiring leases in FY24F are from UOA Corporate Tower. Despite this, we are optimistic on the outlook of UOA Corporate Tower, driven by its MSC status and strategic location within the MSC Malaysia Cybercentre @ Bangsar South City.

• We expect rental reversion to be flattish upon the renewal of tenancies given that the oversupply of office space persists, coupled with inflationary pressures impacting tenant sales.

• No income distribution was declared in 1QFY24 due to its semi-annual distribution policy.

• UOA REIT currently trades at a fair FY25F PE of 14x vs. 4-year average of 15x. Meanwhile, UOA REIT’s FY25F distribution yield spread against 10-year MGS of 2.6% is less appealing compared to a pre-pandemic (2017-2019) median of 2% .

Source: AmInvest Research - 3 May 2024