Analysts up target price for Sentral REIT on ‘solid earnings’

KUALA LUMPUR (Jan 20): Analysts upped their target prices for Sentral REIT (previously known as MRCB-Quill REIT) today following improved results for its financial year ended Dec 31, 2020 (FY20) that was announced yesterday.

Kenanga Research upgraded the stock to “outperform” (from “market perform”) with a higher target price of 93.5 sen (from 82.5 sen) upon lowering its spread to 4.6 percentage points (ppt) (from 5.7ppt).

The research house said this upgrade was based on solid earnings, minimal downsides in FY21 and attractive gross yield of 7.9% versus peers’ average of 5.3% despite Sentral REIT’s earnings being more resilient than retail players which are struggling amidst the pandemic.

“We believe Sentral REIT warrants lower spreads as it was relatively unscathed in FY20 despite the pandemic, while its FY21 prospects appear promising with minimal expiries while we also expect FY21 to be a recovery year with impending vaccinations and lockdowns that are more lenient. Gross yields are attractive at 7.9%, well above MREITs (Malaysian REITs) under our coverage (large cap retail and office MREITS) with an average of 5.3%, while Sentral REIT has proven to be more stable than its peers given that it operates within the office segment with more stable rental,” Kenanga Research’s analyst Marie Vaz noted in a report today.

“Meanwhile, the Covid-19 situation has caused the group to be more diligent in exercising financial discipline, but on the upside, this may help with attractive acquisition opportunities should the situation arise with a healthy balance sheet,” she added.

CGS-CIMB on the other hand, retained its “add” call on Sentral REIT and raised its target price to 99 sen from 85 sen, after its FY20 results beat its expectation.

Its analyst Sharizan Rosely said in a note today, Sentral REIT’s FY20 core net profit of RM79.4 million was above expectations, at 108% of its full-year forecast and 103% of consensus.

“While revenue was in line, the main deviation came from higher-than-expected net property income (NPI) margin of 77% (compared with our full-year estimate of 75%),” he said.

According to him, the REITs’ FY20 core net profit grew 20.2% year on year, driven by lower property operating cost and lower interest expense, due to lower average cost of debt on account of the previous overnight policy rate cuts.

The REIT’s 4Q20 dividend per share (DPS) of 3.7 sen brings total FY20 DPS to 7.1 sen, which was also above CGS-CIMB full-year forecast of 6.2 sen.

“Total DPS translates into a payout ratio of 94% (versus our assumption of 90% for FY20),” said Sharizan.

He pointed out that despite the various lockdown measures and the spike in Covid-19 cases in 4Q20, Sentral REIT also ended the year with a fairly healthy portfolio performance, with FY20’s average renewal rate of 85% and an average occupancy rate of 90%.

“FY20 average rental reversion was in positive territory, although we gathered that it was lower than our assumption of +1%,” said Sharizan.

Going into FY21, he said, the group targets to maintain similar reversion levels, which would be prudent, taking into account the possibility of a prolonged second movement control order (MCO 2.0), which may extend beyond two weeks.

However, Sharizan sees the two-week MCO 2.0 raises the risks of potential space reconfiguration by office tenants, weaker car park income, and extended rental assistance.

“We cut its FY21 to FY22 revenue by 6% on lower occupancy rates of 90% (93% previously) and lower rental reversion of 1% (2% previously) to reflect the impact of MCO 2.0, offset by a higher net property income margin of 77% to 78% (about 76% previously), with a resultant 1% cut in earning per share,” he said.

Sharizan opined that the stock was also supported by its attractive dividend yields of 7-7.2%.

“Our slightly higher FY21F/22F/23 DPS of 6.5/6.5/6.6 sen assumes a 93% payout ratio (90% previously) given minimal capex for asset enhancement initiatives in FY21,” he added.

At the time of writing, Sentral REIT was unchanged at 91 sen, valuing it at RM975 million.

Source: TheEdgeMarkets