News

• MRCB-Quill REIT (MRCBQ) has proposed to acquire Menara Shell from 348 Sentral Sdn Bhd, a wholly-owned subsidiary of its sponsor, Malaysian Recources Corporation Berhad (MRCB) for a consideration of RM640m via a combination of cash and units.

• The property consists of 33 storey office tower together with a 5 storey podium and a 4 storey basement car park with a total net lettable area of 556,468 sq ft. The deal expected to be completed within 30 days from yesterday, 3rd December 2015 pending due diligence (subject to further extension by mutual agreement).

Highlights

• Assuming occupancy rate of 99% and average rental rate at RM7 psf, these would translate to additional rental income of RM46.28m (excluding the car park and other income), representing a rental yield of 7.2%.

• While pending for further details on the ratio of funding for the acquisition, we are assuming identical ratio for the acquisition of Platinum Sentral at 64:36. This implies an issuance of 209m shares based on yesterday's closing price of RM1.09 and cash payable at RM412m.

• The deal would increase our forecasted FY16 annual rental income by 38.4%. Assuming a payout ratio of 95%, DPU would dilute to 8.22 sen from 8.96 sen previously, still returning a decent yield of 7.54%.

• Net asset value would balloon to around RM2.22bn from RM837.7m a year ago.

• However, gearing ratio would escalate to around 49% (industry average at close to 30%) from present level of 42%. That would refrain MRCBQ from further acquisition.

• Overall, we are positive on the acquisition given decent rental yield and the commercial asset is deemed of good quality at a strategic location with reputable tenants and stable income stream.

Risks

• Slow rental reversion rate.
• High gearing compare to industry

Forecasts

• Unchanged pending further details and conclusion of the deal.

Rating

• BUY , TP: RM1.29

Positives

• (1) higher possibility of asset injections from MRCB and EPF; (2) Resilient earnings growth with undemanding valuations – 7.1% DY (FY15E).

Negatives

• (1) Small asset base; (2) illiquid

Valuation

• Maintain BUY recommendation with unchanged TP of RM1.29.
• Our valuation was pegged to slightly higher targeted yield of 6.94% (vs. 6.9%) based on 2SD below 1 year 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 - 4 Dec 2015