- Maintain NEUTRAL, new MYR0.94 TP from MYR0.97, 7% upside with c.8% yield. Sentral REIT’s 3Q22 results are in line with expectations. 3Q net profit declined QoQ due to it being a full quarter without contributions from Wisma Technip and QB2. The outlook for the office sector remains challenging as supply continues to outpace demand, but we think the REIT’s occupancy rate should not fall further than the current 73%. We expect rental reversions to remain flat, as management focuses on maintaining its occupancy rate.
- Results in line. Sentral REIT’s 3Q22 earnings of MYR18.2m (-1.2% QoQ, -17.7% YoY) brought 9M22 earnings to MYR57m (-7.6% YoY). This is in line with our expectations, at 75% of our full-year estimate, but ahead of the Street’s FY22 forecast, at 80%. On a YoY basis, 9M22 revenue was 6.4% lower due to lower contributions from QB2 and Wisma Technip. This was slightly mitigated by the 8.1% decline in property operating expenses. On a QoQ basis, revenue and earnings dropped 3% and 1.2%, reflecting the full- quarter impact from the lack of contributions from the two vacated buildings.
- Occupancy rate of 73% should be the bottom. Sentral REIT’s blended occupancy rate dropped slightly from 78% in 2Q22 to 73%, as the tenant only moved out of Wisma Technip at the end of June. Recall that QB2’s tenant vacated the building in May. Despite the challenging outlook for the office market, we think there are limited downside risks of the occupancy rate falling lower, as other assets remain stable. Management is also intensifying efforts to market the available space under its portfolio, with a focus on bringing in new tenants from the IT, e-commerce, serviced office and shared service sectors. This, however, may take some time before the two buildings are fully occupied again – considering the size of the vacated space.
- 8% of NLA due for renewal in FY23. In FY22, 16% of NLA was not renewed, 11% was renewed at flattish rental reversions, and only 1% is left to be renewed in the financial year. We think that there is a lower risk of non-renewals next year, as most of the leases up for expiry are for Sentral REIT’s strategically located prime office buildings – Menara Shell and Platinum Sentral – which should remain competitive for the REIT.
- We dial back FY23-24F earnings by -3% after adjusting our occupancy rate assumptions. Our TP has a 0% ESG premium or discount applied, since its ESG score of 3.0 is in line with the country median. The key downside risk would be the oversupply of office properties affecting the portfolio’s occupancy and rental rates. Upside risks are higher-than- expected demand for office space and inorganic growth opportunities.
Source: RHB Research - 11 Nov 2022