Results

• Reported 9MFY16 gross revenue of RM97.7m (+18.3% yoy), which translated to normalised net profit of RM45.8m (+23.7% yoy), accounting for 77.8% and 78.8% of HLIB and consensus FY forecasts, respectively.

Deviations

• Lower than expected property operating expenses.

Dividends

• None as it is usually declared on a semi-annual basis.

Highlights

• Yoy, higher revenue (+2.2%) recorded due to additional revenue from Platinum Sentral and higher rental income from step-up rent adjustment of some properties. Excluding one off gain from divestment of Quill Building 10 last year, net profit recorded a marginal increase of 0.6% given higher expenses incurred.

• Qoq, lower revenue (-0.2%) was recorded due to lower rental income from QB8 while operating expenses were marginally higher, resulting net income contracted by 1%.

• YTD, revenue grew (+18.3%) due to additional income from Platinum Sentral and step-up rent adjustments. Growth in bottom-line was higher (+23.7%) as operating expenses were well managed.

• Overall occupancy rate was healthy at 97.2%. In terms of renewals, 64% of lease expiry in FY16 (7% of total NLA) has been renewed with only 8% not renewed.

• Despite the lacklustre office market, MQREIT’s office space is relatively stable and well-guarded from its long WALE (>5 years) with well-spread NLA expiry (13% and 26% expiring in FY17 and FY18, respectively).

• Once the acquisition of Menara Shell is concluded, asset size will grow to circa. RM2.27bn, which allows management to achieve greater scale in asset management. The potential yield accretive asset injection is expected to complete by end of year and will be funded via placement exercises with equity/debt ratio of circa 65/35.

Risks

• High gearing compare to industry average.

• Slower rental reversion rate for office market.

Forecasts

• We lower our property operating expenses assumption for FY16, resulting in higher PAT by 1.9% and higher DPU at 8.5 sen while leaving FY17 & 18 numbers unchanged.

Rating

BUY ↔, TP: RM1.34 ↔

• We continue to like MQREIT given its high dividend yield, stable assets in prime location of KL Sentral with high occupancy rate and healthy WALE profile. Inclusive of Menara Shell, its portfolio assets have increased to RM2.2bn (from current RM1.6bn) and would then graduate into bigger cap space.

Valuation

• Maintain BUY recommendation with unchanged TP of RM1.34 based on targeted yield of 6.5% (2SD below 1 year historical average yield spread of MRCB -Quill REIT and 10- year government bond).

Source: Hong Leong Investment Bank Research - 27 Oct 2016