Highlights

We met with the management of QCT to get some updates on its future direction, following the announcement of its conditional SPA with MRCB to acquire Platinum Sentral (PS) at KL Sentral.

Expediting the PS acquisition. Whilst the latest Bursa announcement targeted the PS acquisition by 4Q14, our dialogue with management suggests that QCT is confident of completing the corporate exercise by 3Q14. QCT is aiming to conduct its EGM in Aug, and to complete its 55-85m new units placement by Sep 2014 (price fixing to take place in Aug 2014).

Expect 3 months’ earnings contribution from PS. Should the PS acquisition be wrapped up by Sep, PS would contribute to earnings in 4Q14. We estimate the impact to be EPU neutral in FY14, but to boost FY15- 16 EPU and DPU by 9-10%.

More details on PS. Overall occupancy is 97%, as the office space is fully taken up, while the small retail/F&B portion is 70% occupied. Average rental rate for PS is RM8.20 psf, vs. RM9.00 in KL Sentral, which suggests more scope for future rental reversion.

Syariah status. We gathered that QCT is highly unlikely to be Syariah-compliant this year: (1) Its borrowings are all conventional and make up 35% of total assets, which is over the 33% threshold. QCT does not intend to convert its debt to Islamic debt. (2) Two of its assets have tenants with non-Syariah compliant activities. Quill 2 @ Cyberjaya is tenanted by HSBC, whilst 4,000 sft of retail space in Plaza Mont Kiara is currently leased out to a liquor outlet. QCT intends to replace the latter with an F&B tenant when its master lease with Sunrise expires in Sep 2014.

Company direction. QCT will continue to be focused on office space, as it has ROFR from MRCB and Quill. We understand that in KL Sentral, the more feasible asset injections are Shell Tower (GDV: RM728m) and Sooka (retail/F&B). Nu Sentral Mall (NFA:650k sft) and Nu Towers are under a “leased land” agreement, and are thus not allowed to be injected into REITs under the SC guidelines. Quill’s new buildings are also predominantly office buildings.

Risks

Oversupply concerns for office assets; management continuity following the entry of MRCB.

Forecasts

Maintained, pending completion of the deal by 4Q14.

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 PS acquisition by 3Q14. Post completion, our TP will be raised to RM1.40 based on a similar 7.5% target yield.

Source: Hong Leong Investment Bank Research - 16 Apr 2014