- We reaffirm our BUY recommendation on MRCB-Quill REIT (MQ REIT) with an unchanged fair value of RM1.35/unit, based on a 10% discount to its DCF value of RM1.50/unit.

- MQ REIT’s 1QFY15 core net profit of RM8mil met expectations although it accounts for 15% of our fullyear estimate of RM54mil, and 16% of consensus estimates.

- Contribution from Platinum Sentral will only be reflected from 2Q onwards as the acquisition was completed on March 30 (9-month contribution for FY15).

- DPU of 1.88sen was reported for 1QFY15.

- Net property income for the 1Q rose by 5% YoY on the back of an 8% rental income growth, attributed to positive rental reversion and high recoveries of several properties.

- Occupancy rate stands at a healthy 93%.

- MQ REIT’s FY15F organic growth will be underpinned by:- (1) 25% of total leases, which are due for renewal at QB1, QB3, QB4, and Plaza Mont Kiara; and (2) on-going asset enhancement initiatives works at QB2 and Plaza Mont Kiara.

- About 24% of the leases due for this year were renewed in 1Q, with the bulk of the balance only due in 4Q with negotiations on-going.

- We continue to like MQ REIT as an ideal vehicle for MRCB to house its prime commercial assets within KL Sentral given MRCB’s monetisation agenda. In the near term, we believe MRCB is likely to engage in another similar deal to monetise its matured property assets following the recent injection of Platinum Sentral.

- Other property assets under MRCB’s stable that could be injected into the REIT are the Shell Tower and Ascott Residences, with a reported cumulatively value of RM900mil. Inclusive of properties owned by Quill Group (i.e. QB6, QB9 and QB18), the collective value is RM1.8bil (for five assets). This would see MQ REIT’s total asset value increase by 113% to RM3.4bil.

- At the current level, MRCB-Quill REIT is trading at an attractive yield of 7.4% for FY15F vis-à-vis its sector peers’ 6% with a yield spread of 352bps over the 10- year Malaysian Government Securities yield of 3.9%.

Source: AmeSecurities Research - 21 May 2015