Results

2Q14 core PAT declined 3.9% yoy to RM8.6m, with YTD net profit of RM16.7m making up 48% and 45% of HLIB and consensus estimates respectively.

Deviations

We consider 1H results inline as we are expecting a stronger 2H 2014, with 24% of its NLA due for renewal in 2H vs. 7% in 1H.

Dividends

4.1 sen net DPU was declared in 2Q14, bringing YTD DPS to 4.1 sen, or 48.4% of our 8.5 sen DPU forecast.

Highlights

Rental income stable yoy. Topline registered a slight 0.4% yoy increase due to higher recovery and rental reversion in some of their properties. YTD, 7% of total NLA have been renewed. Overall occupancy rate remains stable (unchanged from 91% in 1Q14).

Minimal impact from OPR rate hike, given only 5% of its debt is floating rate, at an average financing cost of 4.3%.

NPI down yoy. 2Q14 NPI declined 1.4% yoy due to higher repair and maintenance costs, which led to higher operating expenses (+7.1% yoy).

Updates on corporate proposals. QUIL has submitted its application to the SC for the acquisition of Platinum Sentral and expects to conduct its AGM in Oct. The acquisition is expected to be completed by Dec, upon which the change of name from Quill Capita Trust to MRCB-QUILL REIT will take effect.

Risks

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

Forecasts

FY15-16 EPU forecast raised by 13.4-14.7% to factor in Platinum Sentral acquisition, which is expected to be completed in Dec.

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 – 7.6% DY (FY15E).

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

Valuation

Since we initiated coverage, share price has appreciated by 10% and has hit our previous RM1.20 TP. Given the low execution risk for Platinum Sentral, we now officially revise our TP to RM1.36 to factor in this acquisition (based on the same 7.5% target yield).

We remain long-term positive on QCT as the transformation story remains intact, and we expect more value-accretive injections from MRCB in future.

Source: Hong Leong Investment Bank Research - 23 Jul 2014