Results

• 6MFY15 gross revenue of RM50.8m (+47.1% yoy) was translated into normalised net profit of RM21.9m (+31.0% yoy), accounting for 38.5% and 41.4% of HLIB and consensus FY forecasts, respectively.

Deviations

• Higher than expected cost arising from acquisitions particularly from repair and maintenance as well as administrative expenses.

Dividends

• YTD dividend of 4.10 sen (1H14: 4.10 sen), accounting for 49.9% of our full year DPU assumptions.

Highlights

• Full contribution from newly-acquired Platinum Sentral has kicked-in during the current quarter evident by 31% increase in normalised net profit. Improvement in normalised net profit is also attributable to higher contribution from Plaza Mont’ Kiara, as well as higher rental rate for other properties.

• NPI margin has improved sequentially from 73.5% to 75.6% (Figure #5). We believe with potential asset injections and positive rental reversion from existing portfolio, NPI margin should be able to show favourable improvements.

• We reiterate our positive views on consistently high occupancy rate achieved by MQREIT (circa 93%) as shown in Figure #6, compared with an average of 85% for office market in Klang Valley. Also note that management has successfully renewed 94% of the leases due in 1H15.

Risks

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

Forecasts

• We tweaked our forecast to factor in higher cost upon completion of the acquisition exercise.
• As such, our DPU assumptions for FY15-17 are diluted by 4% and thereby our TP reduced to RM1.29.

Rating

BUY , TP: RM1.29

Positives

• (1) higher possibility of asset injections from MRCB and EPF, following the injection of Platinum Sent ral, resulting in MRCB taking control of QCM and major unitholder of QCT; (2) Resilient earnings growth with undemanding valuations – 7.1% DY (FY15E).

Negatives

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

Valuation

• Maintain BUY recommendation on the equity but our TP lowered to RM1.29 post earnings forecasts adjustments.
• 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 - 23 Jul 2015