• Maintain BUY and DDM-derived MYR0.91 TP, 15% upside and c.9% FY25F yield. Sentral REIT’s 9M24 results were in line with expectations as occupancy rates remain stable at 84%. Looking ahead, we think downside risk to occupancy rates is limited as most tenancies due for renewal in 2025 consist of the REIT’s long-term tenants. We reiterate our BUY call due to SENTRAL’s attractive dividend yield and stable earnings outlook.

• Results in line. 3Q24 core profit of MYR20.5m (flat QoQ, +13% YoY) brought 9M24 earnings to MYR60.9m (+14% YoY). This is in line with expectations at 73-75% of our and Street estimates. YoY revenue grew by 18%, mostly driven by the acquisition of Menara CelcomDigi, alongside improvements in most properties other than Menara Shell which saw a tenancy expiring in June. YTD, NPI margin remained stable at 77%, but net margin was lower at 42% (9M23: 46%), attributed to the increase in KLIBOR rates (76% of the REIT’s borrowings are at a floating rate).

• Optimistic on lease renewals. Blended occupancy levels stood at 84% (Jun 2024: 84%, Dec 2023: 89%). The REIT still has 5% of NLA up for renewal in 4Q24, and 18% in 2025. For now, we do not expect any drop in occupancy levels as the bulk of the leases comprises of the REIT’s long-term tenants. We also expect occupancy rates to improve as the space vacated in Jun 2024 (5% of NLA) comes from one of the REIT’s flagship assets – Menara Shell – which should be attractive for prospective tenants.

• Potential disposal of Wisma Sentral Inai remains a key re-rating catalyst, in our view. The building has remained vacant for two years and is valued at MYR154m as at Dec 2023. If it is sold and the proceeds are used to repay borrowings, we estimate that the savings from interest expenses could lift earnings by up to 8%, although the final valuation may be lower due to the property’s continued vacancy. We also estimate that a disposal could lower the REIT’s gearing from 45% to 41%, affording room for new acquisitions to diversify its portfolio. As of now, we have not factored an asset disposal into our model.

• Earnings forecasts. We lower our FY24F-FY26F earnings by 2% as we adjust our non-property expenses assumptions. TP has a 0%ESG premium/discount applied, as the 3.0 ESG score is in line with the country median. Key downside risks to our outlook are lease non-renewals, and lower-than-expected rental reversions.

Source: RHB Securities Research - 8 Nov 2024