Results

1Q14 core PAT rose 0.7% yoy to RM8.2m, making up 23% and 21% of HLIB and consensus estimates respectively.

Deviations

Due to our imputed 5% portfolio rental reversion. QCT’s portfolio rental reversion was circa 2-3% and we have revised our assumptions accordingly.

Dividends

None (distributions declared twice a year).

Highlights

Rental income decline. Gross revenue declined as portfolio occupancy rate declined yoy from 92% in 1Q13 to 91% in 1Q14, mainly due to higher vacancy rate from Quill Building 3 @ Cyberjaya. However, this remains significantly healthier than the Klang Valley average of 80% (source: Jones Lang Wootton). Also, 1Q saw lower utility recovery for water and electricity.

Impact from GST. Administrative expenses were up 65% yoy and 164% qoq due to accrual of GST advisory fee in 1Q and the write back of over-accrued professional fees for business development.

NPI flat yoy. 1Q14 NPI declined 0.4% yoy due to a combination of lower revenue and higher repair and maintenance costs, which led to higher operating expenses (+0.26% yoy).

Risks

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

Forecasts

FY14-15 forecasts reduced by 3-6% to factor in a more realistic 2-3% rental reversion for its existing portfolio.

We are expecting a slightly stronger 2H 2014, as we understand rental reversion will take place then.

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 – 7.9% DY (FY15E).

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

Valuation

We reduce our TP from RM1.28 to RM1.20 (based on an unchanged target yield of 7.5%), based on our earnings forecast ex the Platinum Sentral (PS) acquisition. Our BUY rating remains unchanged, and we remain long-term positive on QCT as we still believe the transformation story remains intact, with more value-accretive injections from MRCB to come.

Post the acquisition PS by 3Q, our TP would be raised to RM1.36 (based on the same 7.5% target yield).

Source: Hong Leong Investment Bank Research - 2 May 2014