The Long-Awaited Divestment; Keep BUY
Source: rhbinvest
Publish date: Mon, 18 Aug 2025, 12:22 PM
Keep BUY, new DDM-derived MYR0.97 TP from MYR0.93, 20% upside with 9% FY26F yield. Sentral REIT has entered into a conditional sale and purchase agreement to dispose of Wisma Sentral Inai for MYR135m in cash. We view the disposal as a rerating catalyst for the stock, as it removes a long-vacant, non-income generating asset from its portfolio, and boosts its balance sheet flexibility. We like the REIT for its stable earnings outlook, healthier balance sheet, and wide yield spread following the interest rate cut.
Disposal details. SENTRAL hiving off Wisma Sentral Inai to Turiya Properties for MYR135m - the transaction will be conducted fully in cash terms. The proceeds are expected to be used to either repay debts or fund yield-accretive acquisitions. Assuming the proceeds (MYR132m) are used to pare down borrowings, SENTRAL's gearing is expected to improve to 41.9%, from 44.6% as at FY24. The disposal is targeted to be completed by 4Q25.
The property. Completed in 1994, Wisma Sentral Inai is a 12-storey office building with a mezzanine floor and three split-level basement car parks, offering a total NLA of 233k sq ft. The freehold property sits on a 39.4k sq ft land parcel located along Jalan Tun Razak, Kuala Lumpur - a prime commercial area with excellent accessibility. The property has 310 car park bays, but has been vacant since Jul 2022, and was last valued at MYR150m as at FY24.
Our view. We are positive on the disposal, which serves as a long-awaited catalyst for Sentral REIT. Despite the modest net book loss of MYR4m and the sale price being below its last carrying value, the asset has been vacant since 2022 and is unlikely to contribute meaningfully to group numbers in the near term. The divestment removes a drag on the portfolio, with the blended occupancy rate expected to improve to 94% (from 85%), while also unlocking capital that can be redeployed into yield-accretive assets or used to pare down borrowings and lower financing costs. At MYR579 psf on NLA, we view the disposal price as fair vs recent KL office transactions - given the property's age, vacancy, and the prevailing oversupply in the Kuala Lumpur office market.
Forecast and ratings. We raise FY26-27F earnings by 5% each year, to reflect lower borrowing costs post-disposal. Consequently, we lift our DDM-derived TP to MYR0.97 (including a 0% ESG premium/discount). Our TP implies an FY26F yield of 7.9%, offering a spread of 450bps over the 10-year Malaysian Government Bond yield.
Key downside risks to our outlook are the non-renewal of leases, and lower-than-expected rental reversions.
Source: RHB Research - 18 Aug 2025