Summary

• Below expectations. UOAREIT recorded 2Q24 core PAT of RM8.1m (-30.6% QoQ, - 41.7% YoY), bringing the 6M24 core PAT to RM19.8m (-29.6% YoY), which is below expectations, accounting for 40.2% and 33.7% of ours and consensus estimates. Key deviations were mainly due to higher-than-expected operating expenses due to an increase in contribution of sinking fund following the upgrading works in Menara UOA Bangsar (replacement of chiller plants).

• YoY. UOAREIT’s core PAT was down 41.7% YoY, mainly contributed by the decline of approximately 3.1% in gross rental due to the departure of anchor tenant in Menara UOA Bangsar, albeit occupancy rate has recovered to 73% from 57% in 1Q24, while the direct operating expenses rose 235% YoY.

• QoQ. Despite gross rental income rose 5.2% QoQ for 2Q24, core PAT declined 30.6%, mainly contributed by the higher direct operating expenses in 2Q24 as compared to 1Q24 by 44%, coming specifically from Menara UOA Bangsar (+161%), as well as Wisma UOA Damansara I (+10%) and II (+34%).

• Income distribution. 2.90 sen income distribution declared for the quarter, ex-date on 8th of Aug.

• Buildings occupancy rate. Occupancy rate across all the properties have increased QoQ, except for Menara UOA Damansara I, which has slipped marginally by 1%.

• Weighted average lease expiry (WALE) stood at 1.59. As at 2Q24, UOAREIT’s WALE stood at 1.59, as compared to 1.52 and 1.08 in FY23 and FY22, respectively. Overall tenancy expiry profile is 15.2% to 40.2% over 2024-2027.

• Gearing ratio slightly higher. Gearing ratio rose slightly by 0.7% to 40.1% as at 2Q24 versus 39.4% in FY23. We expect the borrowing cost will gradually increase if BNM raised the overnight policy rate (OPR) going forward.

• Outlook. We expect the office space market to remain cautious despite a slight improvement in sentiment. Overall, the influx of new office supply and accelerated inflation continue to be the headwinds going forward, thus rental rates are expected to be flat in the office space market. Nevertheless, overall portfolio occupancy rate has improved to 79% from 75.2% in 1Q24.

Valuation & Recommendation

• Downward revision in forecast. As the core PAT came in below expectation, we reduce the earnings forecast by 20.4% and 13.7% to RM39.1-44.0m for FY24-25f accounting for higher direct operating expenses going forward.

• SELL recommendation with RM0.93 TP. With the revised earnings forecast, we downgrade to SELL from Hold on UOAREIT, with a lower target price of RM0.93. The target price is derived by ascribing a P/E of 14.0x to FY25f EPS of 6.64 sen as we roll over to FY25f earnings. The group is committed to reward at least 90.0% of the distributable income, translating to a prospective dividend yield of 4.7-5.3% for FY24-25f.

• Downside risks. Risks to our recommendation include the slower-than-expected pick up in occupancy rate 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 - 26 Jul 2024