- We initiate coverage on Quill Capita Trust (QCT) with a BUY rating and a fair value of RM1.35/unit, based on a 10% discount to its DCF value of RM1.50/unit. Taken together with our DPU estimate of 8.6sen for FY15F, our fair value implies a total return of 18% at the current price.

- QCT, 30%-owned by Malaysia Resources Corporation Bhd (MRCB), is undergoing transformational growth as it is likely to house MRCB’s prime commercial assets in KL Sentral. QCT will soon be renamed to MRCB-Quill REIT.

- QCT has been given the right of first refusal to purchase properties owned by MRCB and Quill Group. The collective value of RM1.8bil (for five assets) would see its total asset value increase by 113% to RM3.4bil.

- Similarly, QCT’s asset size has almost doubled to RM1.6bil (+91%) following the accretive acquisition of Platinum Sentral from MRCB that was completed in March.

- We estimate FY15F DPU at 8.6sen (+2% YoY), which reflects nine-month contribution from Platinum Sentral (35% of rental income), and a DPU of 8.8sen for FY16F.

- We project rental reversion for FY15F at +3% (excluding contribution from Platinum Sentral), boosted by 26%-occupied floor space that are up for renewal at QB1 (Quill Building 1), QB3, QB4, and some retail space in Plaza Mont Kiara; coupled with agreed step-up rentals (1%- 2% p.a.) at other properties.

- Further upside in DPU will come from the ramp-up in occupancy rate, namely for QB3, QB5, QB8 and Plaza Mont Kiara. While QCT’s overall portfolio occupancy is strong at 95% (excluding the disposal of QB10 in May), QCT is on the constant lookout to reduce vacancy.

- One of its strategy is to get anchor tenants to take-up additional NLA during lease renewals. As it is, we understand that QB3’s major tenant, BMW (which occupies 40% of NLA currently), intends to take up additional NLA upon lease renewal this year; this will increase QB3’s occupancy rate to about 80% from 73% currently.

- Gearing is estimated to be manageable at 44% at end- FY15F – below the 50% level. In our earnings model, we have taken into account the debt funding of RM398mil for Platinum Sentral.

- QCT has an attractive yield of 7.1% for FY15F vis-à-vis its sector peers’ 6% with a yield spread of 320bps over the 10- year Malaysian Government Securities yield of 3.9%.

Source: AmeSecurities Research - 23 Apr 2015