Highlights

Capitaland (CAPL) has entered into a heads of agreement to dispose its 40% stake in Quill Capita Management Sdn Bhd (QCM) to MRCB.

Since the announcement, share price has declined 16%, and remains 10% below the pre-announcement price, a clear indication that market is taking the news of CAPL’s supposed exit negatively.

In our view, there is a misperception that CAPL is making a complete exit given that CAPL has not been selling its stake in QCT itself, which allows it to continue participate in QCT future upside.

Moreover, we opine that CAPL sale of its stake in QCM paves the way for MRCB (who accepted QCT shares at premium in exchange for the injection) to inject more assets into QCT while it is not a great loss to QCT as the original management company has not added any value since QCT’s listing.

We also table in Figure #2 the list of assets (totalling 8.0m sq ft with value of RM8.3bn) that MRCB could inject into QCT in the future, which would make QCT one of the largest REITs in the country. We also believe that QCT will not only enjoy the backing of MRCB, but also from EPF as well.

We estimate that QCT is trading at 8.9% yield, and this presents a good time for investors to enter QCT, as we believe that downside is now limited at this juncture while upside could be tremendous if MRCB is able to conjure up a series of yield-accretive injections.

Catalysts

Potential future injections from MRCB and EPF.

Risks

Higher vacancy rates from its office assets; Platinum Sentral asset injection does not go through.

Forecasts

If we factor in Platinum Sentral, our FY15-16 EPU and DPU estimates would be 19-20% higher (this includes the dilutive effects of the 200m new units issued to fund the injection).

In the absence of Platinum Sentral, we estimate a much more normalise organic growth rate of 4-5% per annum, in-line with the 5% yoy increase in rental income from QCT’s portfolio assets.

Rating

Initiate with a BUY

Positives: (1) higher possibility of asset injections from MRCB and EPF, following the injection of Platinum Sentral and MRCB taking full control of QCM. (2) Undemanding valuations – 8.9% DY (FY15E).

Negatives: Small asset base; illiquid; lack of retail assets.

Valuation

We value QCT based on target DY. As a benchmark, Sunway REIT is currently trading at 7.1% yield.

If we apply a 7.5% target yield to our FY15E DPU, this would give a TP of RM1.28. We believe the 7.5% target yield is justified by QCT’s current low liquidity and high concentration in office space.

If the acquisition of Platinum Sentral goes through, our TP would be boosted to RM1.53 (based on 7.5% DY).

Source: Hong Leong Investment Bank Research - 17 Mar 2014