Results

• 1QFY15 gross revenue of RM18.6m (+8.3% yoy, 2.3% qoq) was translated into normalised net profit of RM8.3m (+1.4% yoy), accounting for 16.0% and 16.5% of HLIB and consensus FY forecasts, respectively.

• We deemed this as in-line as we expect full contribution from newly-acquired Platinum Sentral to kick in from second quarter onwards.

Deviations

• In-line.

Dividends

• None (1Q14 : None).

• Dividends normally declared semi-annually – during second and fourth quarter.

Highlights

• During the quarter, gross revenue increase by +8.3% yoy on the back of higher rental rates and recoveries. Operating expenses also increase by +18.2% yoy due to higher repair and maintenance cost and also recognition of property expenses for Plaza Mont’ Kiara upon its expiry of master lease agreement in Sept 2014.

• Both NPI margin and occupancy level remain healthy (Figure #4 and Figure #5 respectively).

• Acquisition of Platinum Sentral has been completed on 30 March and two days revenue contribution has been recognised during the quarter. Post-acquisition, 47% of properties are now concentrated in KL Sentral area (Figure #6) and GLCs have emerged as a substantial tenant of the portfolio (Figure #7).

• As at 31 March 2015, fixed and floating borrowing was at 62:38. However, on 21 April 2015, management has entered into interest rate swap to convert its floating interest rate to become fully fixed interest rate.

• We understand that there are few assets held by sponsors which are ready to be evaluated for injection purpose, such as Shell Tower & Ascott Residence, Quill Building 6, Quill Building 9 and Quill Building 18.

Risks

• Management continuity following the entry of MRCB.
• Slow rental reversion rate.

Forecasts

• Unchanged.

Rating

BUY , TP: RM1.34

Positives

• (1) higher possibility of asset injections from MRCB and EPF, following the injection of Platinum Sentral, resulting in MRCB taking control of QCM and major unitholder of QCT; (2) Resilient earnings growth with undemanding valuations – 8.6% DY (FY15E).

Negatives

• (1) Small asset base; (2) illiquid; (3) lack of retail assets.

Valuation

• Maintain BUY recommendation on the equity and unchanged TP of RM1.34.
• Our valuation was pegged to targeted yield of 6.9% based on 2SD below historical average yield spread of MRCB-Quill REIT and 7-year government bond in view of high potential for yield accretive injection(s).

Source: Hong Leong Investment Bank Research - 21 May 2015