Summary

• Earnings in-line. UOAREIT registered a 3Q24 core PAT of RM10.5m (+29.4% QoQ, - 25.4% YoY), bringing the 9M24 core PAT to RM30.2m (-28.2% YoY). The results were within expectation, accounting for 77.3% and 66.3% of ours and consensus estimates, respectively.

• YoY. UOAREIT’s core PAT dropped 25.4% YoY, mainly due to a significant decline in rental income from Menara UOA Bangsar as the anchor tenant exited in 3Q24. The departure of the tenant has led to a drop in the occupancy to 58% from 98% in 3Q23, and gross rental income fell 48%, from RM5.8m in 3Q23 to RM3.0m in 3Q24.

• QoQ. Gross rental income rose marginally by 0.6% to RM27.8m, while core PAT increased significantly by 29.4% QoQ to RM10.5m. The growth was driven primarily by higher overall rental income (excluding Menara UOA Bangsar), and 18% reduction in direct operating expenses, from RM11.1m in 2Q24 to RM9.1m in 3Q24.

• Income distribution. No income distribution declared for the quarter under review.

• Buildings occupancy rate. Occupancy rate across all the properties have improved QoQ, except for Menara UOA Damansara II and Menara UOA Bangsar, which saw declines of 1% and 15%, respectively.

• Weighted average lease expiry (WALE) stood at 1.61. As at 3Q24, UOAREIT’s WALE stood at 1.61, as compared to 1.52 and 1.08 in FY23 and FY22, respectively. Overall tenancy expiry profile is 10.3% to 43.3% over 2024-2027.

• Gearing ratio slightly higher. Gearing ratio rose slightly by 1.5% to 40.9% as at 3Q24 versus 39.4% in FY23. Should BNM raise the OPR, borrowing costs are expected to rise gradually.

• Outlook. Challenges in the office space market, including rising business costs, inflation, and new supply, are expected to create a more competitive environment. While we foresee a gradual improvement in sentiment, rental rates are likely to remain flat. Despite a decline in the portfolio occupancy rate from 79% in 2Q24 to 77.3% in 3Q24, we anticipate gradual tenant replacement at Menara UOA Bangsar in 2025, with smaller units leased to multiple tenants.

Valuation & Recommendation

• Forecast. Maintained with RM39.1-44.0m core PAT for FY24-25f.

• HOLD recommendation with RM0.93 TP. As the share price has declined after our downgrade, we upgrade to HOLD from SELL on UOAREIT, with a target price of RM0.93, reflecting a downside of 6.1%. 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 5.3-6.0% for FY24-25f.

• Downside risks. Risks to our recommendation include the slower-than-expected pick up in occupancy rate in Menara UOA Bangsar. 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 - 15 Nov 2024