Results

• 1QFY16 gross revenue of RM32.7m (+75.5% yoy) was translated into normalised net profit of RM15.24m (+84.1% yoy), accounting for 26.2% and 26.8% of HLIB and consensus FY forecasts, respectively.

Deviations

• None.

Dividends

• None as dividend is usually declared semi-annually.

Highlights

• Resilient revenue growth (yoy & qoq) in 1QFY16 due to additional income from Platinum Sentral and step-up rent adjustments. Net income grew higher by 84.1% yoy helped by lower repairs and maintenance this year, while -6.9% qoq given low base of opex last quarter from cost saving provision.

• Overall occupancy rate was stable at 97.1% (0.4% of NLA not renewed was from Plaza Mont Kiara). Major AEIs planned for this year include energy saving and carbon footprint reduction at both Quill Building 1-DHL and Quill Building 4-DHL as part of the negotiation during renewals.

• As reported in our previous note, we understand that the RM640m acquisition of Menara Shell will only likely to complete in 1QFY17. Currently, the vendor is in the midst of preparing the submission of an application for a certi ficate of the proposed strata plan to subdivide Menara Shell and other buildings attached under a master title. In terms of funding, right issues or placements and minimal debt would be in the mix in order to pare down the gearing level.

• Despite challenging outlook for 2016, only 7% of the NLA is due for renewal, hence, downside is minimal from risk perspective. In terms of inorganic growth, other than the imminent sizable acquisition in Menara Shell, we understand that management is not looking at any other acquisition/injection in FY16.

Risks

• High gearing compare to industry average.
• Slower rental reversion rate for office market.

Forecasts

• Unchanged.

Rating

BUY , TP: RM1.24

• Consistent high DPU yield (>7%) and imminent assets injection in near future.

Positives

• (1) high possibility of asset injections from sponsor; (2) resilient earnings growth with undemanding valuations.

Negatives

• (1) High gearing; (2) illiquid; (3) softer office market.

Valuation

• Maintain BUY recommendation with unchanged TP of RM1.24.
• Our valuation was pegged to targeted yield based on 2SD below 7.2%, 1 year historical average yield spread of MRCB-Quill REIT and 10-year government bond in view of imminent yield accretive injection(s).

Source: Hong Leong Investment Bank Research - 3 May 2016