Investment Highlights

We maintain HOLD on UOA REIT with an unchanged TP of RM1.06/unit based on DDM. FY24 realised income was within expectations accounting for 102.7% of our and consensus projection. Final DPU of 3.2 sen/unit proposed resulting in FY24 DPU of 6.14 sen/unit in line with our forecast. We continue to see limited DPU growth in FY25F as oversupply of offices limits positive rental reversion while AEIs need to be implemented to sustain existing as well as attract new tenants on aged office buildings. Nevertheless, distribution yield is decent at 6.7% for FY25F provides a decent spread of 285bps against the 10-year MGS of 3.85%. Our TP implies a neutral 3-star ESG rating.

• Results within expectations. FY24 realised income of RM44.2mil excluding the unrealized losses from fair value adjustment of investments properties of RM9.8mil was within expectations accounting for 102.7% of our and consensus projection. FY24 UOA REIT's gross rental fell 2.0% YoY due to the departure of anchor tenants from Parcel B - Menara UOA Bangsar in the earlier quarters of FY24 as well as the continued low occupancy rate of Wisma UOA II. Meanwhile, FY24 NPI fell by 10.2% YoY contributed by higher operating expenses from the upgrading works carried out at Menara UOA Bangsar.
• Average occupancy rate of properties improved QoQ. The average occupancy rate of the assets under management improved to 81% in 4Q24 from 77% in 3Q24. Occupancy rates for UOA Centre, UOA Damansara, Parcel B - Menara UOA Bangsar improved while occupancy rate of UOA Corporate Tower, with MSC status and strategically located within the MSC Malaysia Cybercentre @ Bangsar South City remained robust at 100%.
• Rental reversion of aged office buildings to stay flattish amidst the continued oversupply of offices. Pressure on rental rates on offices persist. Room for positive rental reversions is limited in the near term due to the continued pressure on rental rates from the glut of office spaces.

Company profile

UOA REIT started operations on 1 December 2005 and was listed on the Main Market of Bursa Malaysia on 30 December 2005. The REIT has 6 office assets (UOA Centre, Wisma UOA II, Wisma UOA Damansara I and II, Parcel B – Menara UOA Bangsar and UOA Corporate Tower) in the portfolio. The average occupancy rates the assets under management was 81% in 4QFY24, an improvement from 77% in 3Q24.

Investment thesis and catalysts

We maintain our HOLD recommendation on the stock with an unchanged TP of RM1.06/unit based on DDM. Current unit price of RM0.93 represents a discount of 34% from our projected FY25F NAV of RM1.41/unit. Room for positive rental reversions is limited due to the continued pressure on rental rates from the glut of office spaces.

Valuation methodology

We are valuing the stock based on DDM with a WACC of 7.2% (beta: 1, market risk premium: 7.1%, pre-tax cos of debt: 3.8%, long term growth rate: 0.5%)

Risk factors

Risk to our call includes higher than expected 10-year MGS yield following the elevated interest rates in US post elections which could lower distribution yield spread and attraction for the REIT.

Source: AmInvest Research - 22 Jan 2025