UOA Real Estate Investment Trust’s (UOAREIT) 3Q23 core earnings came in at RM14.1m (1.2% QoQ, – 13.1% YoY), brought the 9M23 sum to RM42.1 m (-8.0% YoY), which accounted for 72.6% and 69.5% of Malacca Securities’ (MMSB )and consensus to be considered as being within expectations.
Malacca Securities Stock Digest today (Nov 17) said, on a year-on-year basis, UOAREIT’s core earnings were down 13.1% YoY, mainly contributed by increased property operating expenses such as higher electricity costs and additional rental commissions paid as well as higher borrowing costs.
Income distribution
No income distribution for the current quarter. YTD, UOAREIT has declared an interim income distribution of 3.96 sen for FY23, ex-date on 7th of Aug.
Buildings occupancy rate
Besides Wisma UOA Damansara II and UOA Corporate Tower showing a mild decline in building occupancy rate to 75% (from 76%) and 94% (from 96%), respectively, the rest of the properties managed to demonstrate improvements in 3Q23.
Weighted average lease expiry (WALE) stood at 1.22. As at 3Q23, UOAREIT’s weighted average lease expiry (WALE) stood at 1.22, as compared to 1.33 and 1.08 in FY21 and FY22, respectively.
Overall tenancy expiry profile is 13.0 % to 36.6% over 2023-2026.
Gearing ratio slightly higher
The Reit’s gearing ratio added 0.9% to 39.9% as at 9M23 versus 39.1% in FY22. MSSB expects the borrowing cost will increase after Bank Negara Malaysia raised the overnight policy rate (OPR) to 3.00% in May-2023.
Outlook
MSSB remained cautious on the office space outlook as market sentiment remained soft amid uncertainties arising from elevated inflation, future interest rate hikes as well as oversupply conditions in the office space segment; thus rental rates are expected to be flattish.
Overall portfolio occupancy rate stood at 81.0% as at 3Q23 may gradually tick higher, but still below pre-pandemic level of 91.5% in FY19.
Valuation & Recommendation
Maintained earnings forecast. As the core net profit came in within expectation, we maintained the earnings forecast for FY23-25f.
HOLD recommendation with RM1.20 TP
MSSB maintained a HOLD recommendation on UOAREIT, with target price of RM1.20. The target price is derived by ascribing a P/E of 14.0x to FY23f EPS of 8.6 sen. The group is committed to reward at least 90.0% of the distributable income of the Trust.
Downside risks
Risks to MSSB’s recommendation include the slower-than-expected recovery in the rental activities due to the shift of working method post pandemic environment.
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.
