Analysts foresee better financial performance by Sentral REIT on Menara CelcomDigi purchase

• The analysts made their forecast after the REIT posted a net property income of RM29.21 million for the second quarter ended June 30, 2023 (2QFY2023) from RM27.94 million a year earlier, reflecting a 4.55% growth.

KUALA LUMPUR (Aug 11): Analysts foresee an improvement in Sentral REIT's financial performance, underpinned by the office-retail property trust's proposed acquisition of Menara CelcomDigi.

The analysts made their forecast after the REIT posted a net property income of RM29.21 million for the second quarter ended June 30, 2023 (2QFY2023) from RM27.94 million a year earlier, reflecting a 4.55% growth.

In a research note on Friday (Aug 11), Hong Leong Investment Bank (HLIB) reiterated its optimism on the ongoing acquisition of Menara CelcomDigi due to its long-term single tenancy structure, as well as an attractive rental yield of 8%, further commenting that it thinks Sentral REIT’s risk-to-reward profile is reasonably balanced at this juncture.

The research unit was also positive on Sentral REIT’s outlook, given that 10% of its total net lettable area is due for expiry in 2023, half of which has been renewed and management does not foresee any major issues in renewing the balance, said HLIB.

However, it said that Sentral REIT’s 2QFY2023 core net profit performance was below its estimates due to higher-than-expected property operational expenditure and finance costs.

Thus, it trimmed its target price (TP) to 75 sen from 84 sen while maintaining its "hold" call. Its TP is based on FY2023 forward distribution per unit (DPU) on a targeted yield of 9.7%, which is derived from a five-year historical average yield spread between Sentral REIT and 10-year MSG.

The group’s 2QFY2023 core net profit of RM17.6 million was a 0.2% drop quarter-on-quarter (q-o-q) and a 4.4% fall year-on-year (y-o-y), bringing its 1HFY2023 sum to RM35.3 million (-9.1% y-o-y), HLIB added that the results were below its estimates (45%) but within street forecasts (50%).

With office owners grappling with intense competition in the office market, HLIB believes rental rates for office spaces in Klang Valley will remain suppressed going forward.

“As heightened cost pressures were not able to be passed down to tenants via upward revision in rental rates, we see muted earnings for office REITs,” HLIB said.

HLIB further trimmed its FY2023f-FY2024f-FY2025f forecasts by -0.7% (FY2023f), -6.6% (FY2024f) and 6.9% (FY2025f) as it factored in higher utilities and finance cost assumptions.

Similarly, Maybank Investment Bank Bhd expects earnings improvement from FY2024f following the acquisition of Menara CelcomDigi, thus, no change was made to its "buy" call and dividend-discount-model (DDM) based TP of 91 sen, supported by decent FY2023-FY2023E net DPU yields of 6.2% to 7.1%.

It also added that the real estate investment trust’s 2QFY2023 result was within expectations, with 1HFY2023 net profit hitting 49% on its full-year estimate and 50% on the consensus’ full-year estimate.

“We expect earnings to remain stable in the 2H2023, with some ease at utilities expenses due to a slight reduction in imbalance cost pass-through (ICPT) surcharge rate. We maintain our FY2023-2025E earnings estimates,” Maybank stated.

Looking forward, Sentral REIT’s strategies remain focused on improving occupancy and securing new tenants for its vacant properties, with management targeting to secure some tenants at Wisma Technip and QB2 by the end of this year.

Maybank said that it understands that the group is not dismissing opportunistic divestment of its vacant properties and continues to explore yield accretive acquisition opportunities, though it notes that changes in rental rates, occupancy rates, opex and interest rates may impact Sentral REIT’s future earnings.

As of writing, shares of Sentral REIT remained unchanged at 85 sen, valuing the group at RM911.01 million.

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