News

QCT has entered into a conditional SPA with MRCB to acquire Platinum Sentral (PS), at KL Sentral (475,857 sft NLA) for RM750m. The building is currently 97% occupied.

Recall that QCT had entered into a Heads of Agreement with MRCB for the abovementioned acquisition on 29 Jan 2014.

The PS acquisition will be paid as follows: (1) RM486m in cash, to be funded by a placement of 55-85m new QCT units; and (2) RM264m via the issuance of 206.3m new QCT units at RM1.28/unit to MRCB. The proposals are expected to be completed in 4Q 2014.

Post-acquisition, MRCB is expected to emerge as the single largest shareholder of QCT with a 30-32% equity stake, depending on the size of the placement.

QCT has also proposed a change of name from Quill Capita Trust to MRCB-Quill REIT.

Financial impact

We had previously projected 19-20% EPU and DPU accretion for FY15-16 from the PS acquisition, based on the dilutive effects of the 200m new units (to be issued to MRCB) from the earlier announcement.

However, with the proposed placement of up to 85m new units, the boost to our FY15-16 estimates will be reduced to 9.2-9.7%, still an accretive deal.

QCT’s gearing is expected to rise from 0.35x to as much as 0.46x following the PS acquisition.

Pros / Cons

MRCB has stated its intention to inject RM1bn worth of assets into QCT every year, and that MRCB has a pipeline of RM20bn worth of properties to be injected over the next few years. As a comparison, Sunway REIT’s investment properties are valued at RM5.2bn.

With the official SPA finally announced, we look forward to more value-accretive asset injections from MRCB in future.

Risks

Higher vacancy rates from its office assets; oversupply concerns for office assets.

Forecasts

Maintained, pending completion of the deal by 4Q 2014.

Rating

BUY

Positives: (1) higher possibility of asset injections from MRCB and EPF, following the injection of Platinum Sentral and MRCB taking control of QCM. (2) Undemanding valuations – 8.5% DY (FY15E).

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

Valuation

We maintain our TP at RM1.28 (based on an unchanged target yield of 7.5%), pending completion of the acquisition. Upon completion, our TP could potentially be raised to RM1.40 assuming unchanged target yield of 7.5%.

Source: Hong Leong Investment Bank Research - 14 Apr 2014