Summary

• Below expectations. UOAREIT registered 1Q24 core PATMI of RM11.7m (+12.1% QoQ, -17.8% YoY), which is below expectations, accounting for 19.9% of ours and consensus estimates. Key deviations were mainly due to (i) lower-than-expected gross rental income and (ii) higher-than-expected operating expenses.

• YoY. UOAREIT’s core PATMI was down 17.8% YoY, mainly contributed by the decline of approximately 8.5% in gross rental due to weaker occupancy rate of 57% (vs. 97% in 1Q23) in Menara UOA Bangsar following the departure of the anchor tenant, while the direct operating expenses rose 15% YoY.

• QoQ. Meanwhile, despite softer gross rental income at RM26.2m (-3.3% QoQ) for 1Q24, core PATMI rose 2.5%, mainly contributed by the decline in operating expenses in 1Q24 as compared to 4Q23.

• Income distribution. No income distribution declared for the current quarter.

• Buildings occupancy rate. Most of the properties under UOAREIT have gained traction in terms of occupancy rate except for Menara UOA Bangsar, which has dropped significantly from 97% in 4Q23 to 57% in 1Q24.

• Weighted average lease expiry (WALE) stood at 1.54. As at 1Q24, UOAREIT’s weighted average lease expiry (WALE) stood at 1.54, as compared to 1.52 and 1.08 in FY23 and FY22, respectively. Overall tenancy expiry profile is 4.1% to 30.5% over 2024-2026.

• Gearing ratio slightly higher. Gearing ratio added 1.1% to 40.5% as at 1Q24 versus 39.4% in end-FY23. We expect the borrowing cost will gradually increase after Bank Negara Malaysia raised the overnight policy rate (OPR) to 3.00% in May-2023.

• Outlook. We believe the office space outlook will remain cautious amid the uncertainties arising from elevated inflation, future interest rate hikes as well as oversupply conditions in the office space segment; thus rental rates are expected to be flattish. Overall portfolio occupancy rate stood at 75.2% following the departure of an anchor tenant in Menara UOA Bangsar (MUB) could be a sign of softer rental income for FY24.

Valuation & Recommendation

• Maintained earnings forecast. As the core PATMI came in below expectation, we reduce the earnings forecast for FY24-25f by 12-16% to RM49.1-52.0m.

• HOLD recommendation with RM1.02 TP. Despite revising the forecast lower, we maintain a HOLD recommendation on UOAREIT, with a target price of RM1.02. The target price is derived by ascribing a P/E of 14.0x to FY24f EPS of 7.3 sen. The group is committed to reward at least 90.0% of the distributable income. Prospective dividend yield stood at 5.9-6.3% for FY24-25f.

• Downside risks. Risks to our recommendation include the slower-than-expected replacement of the anchor tenant in MUB. Besides, should the BNM increase interest rate going forward, the group may incur higher borrowing cost. Also, if there is a hike in electricity tariff, it could weigh on UOAREIT’s margins and overall financial performance moving forward.

Source: Mplus Research - 6 May 2024