• Maintain NEUTRAL, MYR0.92 TP, 10% upside and c.8% yield. Sentral REIT announced the proposed acquisition of Menara CelcomDiGi from Puncak Wangi, a subsidiary of Sentral’s sponsor, Malaysian Resources Corp (MRC MK, BUY, TP: MYR0.40) for a purchase consideration of MYR450m. The building is fully occupied by Celcom, with a long-term lease ending in 2040. We are mildly positive as the building is of Gold Green Building standard, which should enhance the REIT’s profile going forward, although the acquisition is just slightly yield accretive or neutral.

• Acquisition details. The total purchase consideration of MYR450m (or MYR1,000 psf) is equal to the independent valuation by CBRW WTW. To partly fund the acquisition, the REIT will undertake a placement which entails the issuance of up to 123.7m units (11.5% of the existing total units). Including estimated expenses related to the proposals, the total cost is approximately MYR454.8m. Assuming the placement is fully subscribed, it would raise roughly 20% of the total funds required, with the rest to be funded via borrowings. MRCB has given an undertaking to unconditionally subscribe for up to 34.6m units in order to maintain its unitholding in Sentral. The acquisition is expected to be completed by 4Q23.

• Menara CelcomDigi is a five-year-old 27-storey purpose-built office building erected on six levels of podiums and three levels of basement car park. The building is located in a prime commercial hub within Petaling Jaya New Town with good connectivity to Kuala Lumpur via the Kelana Jaya LRT line and the Federal Highway. It has a net lettable area of 450,000 sq ft, and is leased to Celcom for 15 years – commencing 1 Jan 2020 and expiring on 31 Dec 2034, with an automatic extension of two further terms of three years each expiring on 31 Dec 2040. The building is certified as a Leadership in Environmental & Energy Design (LEED) Gold Green Building in Nov 2020, which will boost Sentral’s environmental target to reduce energy usage and carbon emission intensity levels.

• Mildly positive. Based on FY22’s gross rental income of MYR36m, it translates to an attractive gross yield of 8%, and NPI margin is expected to range between 70-75%. The acquisition is expected to be yield-neutral or mildly accretive, but we are wary of the risk of Sentral taking up more borrowings than expected, as it only has a MYR500m debt headroom before reaching the 50% gearing limit. Nevertheless, in the long run, the stability of the long-term lease agreement with pre-agreed rental reversion will improve the REIT’s portfolio.

• Maintain NEUTRAL. We keep our earnings forecast unchanged for now, pending the completion of the two proposals. Our TP incorporates a 0% ESG premium/discount based on our in-house methodology.

Source: RHB Research - 26 Jul 2023