Investment Highlights

• We maintain BUY on UOA REIT with an unchanged fair value (FV) of RM1.42/unit based on dividend discount model (DDM), which incorporates a neutral 3-star ESG rating (Exhibits 8 & 9). This implies a FY24F distribution yield of 6%, at parity to its 5- year median.

• We make no changes to our earnings forecast as UOA REIT’s FY22 distributable income of RM61mil was within our and consensus’ expectations. It came in 4% below our estimates and 5% of street’s.

• We also take the opportunity to introduce our FY25F earnings with a growth of 2% on the basis of stable improvements in occupancy rates and rental reversions.

• In FY22, both UOA REIT’s gross revenue and net property income (NPI) declined 2% YoY as a result of a decline in its average occupancy rate to 80% in 4QFY22 from 82% in 4QFY21.

• QoQ, UOA REIT’s revenue slid 2% while NPI fell 8%. The lower NPI was mainly attributed to higher direct operating expenses incurred in UOA Corporate Tower.

• 57% of its tenancies are set to expire in FY23 (Exhibit 4). We expect rental reversion to be flattish upon the renewal of tenancies given the growing oversupply of office spaces, coupled with heightening inflationary pressures on tenant sales.

• UOA REIT declared its gross distribution per unit (DPU) of 4.3 sen in 4QFY22. The FY22 DPU of 8.6 sen represents a distribution yield of 7%.

• We anticipate the Fed rate to peak in 1HFY23 as a result of weaker economic data and softening inflation. Our in-house economist projects another 0.75% hike in the Fed rate in 1HCY23 from the current level of 4.25-4.5%. Meanwhile, the 10- year MGS yield is forecasted to be lower by the end of 2023 at 3.8%-4%.

• We anticipate the yield spread from FY23F onwards to widen to 4% vs. 5-year median of 2%. Hence, we expect UOA REIT to be appealing to yield-seeking investors with its higher yield spread against 10-year MGS (Exhibit 7).

• We like UOA REIT’s long-term prospects, bolstered by its:
  
  (i) strategically located properties which are well-connected in neighbourhoods via bridges, major highways and public transportation;
  (ii) diverse tenant mix, which could mitigate potential rental collection risks during economic downturns (Exhibit 5);
  (iii) excellent track record of distributing at least 94% of net income to unitholders with a strong distribution yield of 8% from FY23F to FY25F; and (iv) large pipeline of potential asset injections from its sponsor – UOA Development (Exhibit 6).

• UOA REIT currently trades at a compelling FY24F PE of 12x vs. 4-year average of 17x. Meanwhile, FY24F distribution yield of 8% is attractive vs. 10-year MGS yield of 4%.

Source: AmInvest Research - 20 Jan 2023