Hiccups Should Be Temporary For Sentral REIT, Says RHB

Sentral REIT’s 1Q24 results were below expectations due to higher-than-expected expenses, resulting in a QoQ drop in core EPU.

RHB Investment Bank (RHB) said today (May 9) that they retain their call on the REIT as a defensive play, with its long-term earnings outlook supported by the newly acquired Menara CelcomDigi, and its c.8% dividend yield ranking among the highest for M-REITs.

RHB maintains BUY at a MYR0.91 TP.

Results below expectations. 1Q24’s core profit of MYR19.9m (-4% QoQ, +13% YoY) was below expectations at 22-23% of ours and Street’s estimates. Topline was in line (+7% QoQ, +28% YoY), recording higher income from the newly acquired Menara CelcomDigi, as well as Sentral Building 4, Sentral Building 3, and Platinum Sentral.

However, the full quarter operating expense from Menara CelcomDigi was higher than expected, and the cost of debt increased to 4.5% (4Q23: 4.4%) due to the higher KLIBOR rate. Sentral REIT recorded a DPU of 1.66 sen (4Q23: 1.88 sen, 1Q23: 1.65 sen).

Occupancy rate stable at 88%. With 14% of the REIT’s total NLA up for renewal, it has renewed 14% of the expiring space with one non-renewal in 1Q24 (0.5% of NLA). In 2Q24, RHB expects the REIT’s blended occupancy rate to drop to c.85% with a tenancy in Menara Shell set to expire.

RHB was not too concerned as the property is one of the REIT’s flagship, green-certified buildings, and has received enquiries from potential tenants.

For now, RHB expects the space to be filled up by end of the year. For FY25, 18% of the REIT’s NLA will be up for renewal, mostly consisting its Cyberjaya portfolio.

Gearing remains at 45%, close to the 50% gearing limit imposed by the Securities Commission.

RHB thinks any disposal opportunity for Wisma Sentral Inai will be a re-rating catalyst for the REIT.

The property is valued at MYR154m (6% of Sentral REIT’s asset value), which – if used to repay borrowings – could reduce the REIT’s gearing ratio to 41%.

Earnings forecast. RHB has lowered their FY24 earnings forecast by 5% after adjusting their occupancy rate assumptions, and FY25F-26F by -2% after increasing cost assumptions.

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