KUALA LUMPUR (Nov 11): CGS-CIMB has cut its target price for Sentral REIT by 6% to 90.1 sen from 95.5 sen, after the trust reported a 12.5% decline in its net property income (NPI) to RM28.4 million for the third quarter ended Sept 30, 2022 (3QFY2022) on Thursday (Nov 10).

The dividend discount model-based TP was reduced to account for a higher cost of equity of 7.9%, from 7.5% previously, as CGS-CIMB factored in a higher adjusted beta, said its analyst Sharizan Rosely.

"We retain our 'hold' rating as the prospect of a declining portfolio occupancy rate could continue to cap upside to share price, which is supported by attractive FY2022-2024F dividend yields of 6.7-7.5% (highest in our M-REIT [Malaysian real estate investment trust] coverage)," he said.

"We retain our view that rental income will continue to fall on lower occupancy rates as tenancy replacements for Wisma Technip and Quill Building 2 are unlikely to materialise so soon due to current market conditions; we also still project partial tenancy replacements in FY2024 [financial year ending Dec 31, 2024].
 
"Our 78% NPI margin assumption for FY2022-2024 is intact. For FY2022, 28% of total committed NLA [net lettable area] is due for renewal. Sentral REIT achieved a 40% renewal rate for expiring tenancies as at Sept 22, which we believe was likely at marginally negative to flattish average rental reversions, supported by Menara Shell’s improved occupancy rate of 99% (marginally positive rental reversions) with the entry of a new IT multinational company tenant in 2QFY2022," he said.

Sentral REIT's revenue for 3QFY2022  also fell 11.92% to RM35.69 million from RM40.52 million, due to lower contributions generated from QB2-HSBC and Wisma Technip, but they were partially offset by the increase in revenues from Menara Shell and Plaza Mont Kiara.

At the noon break, Sentral REIT was unchanged at 88 sen, giving it a market capitalisation of RM943.17 million.

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Sentral REIT's 3Q net property income falls 12.5%