Results

• Reported FY16 gross revenue of RM131.8m (+14.4% yoy) which translated to normalised net profit of RM59.2m (+10.8% yoy), accounting for 98.7% and 98.4% of HLIB and consensus FY forecasts, respectively.

Deviations

• None.

Dividends

• No dividend was declared as the 2HFY16’s dividend of 4.15 sen was announced back in November 2016 before the placement exercise. FY16 total dividend of 8.38 sen (FY15: 8.47 sen) yields 6.4% at current price.

Highlights

• YoY: Higher revenue (+4.6%) recorded on the back of additional revenue from the newly acquired Menara Shell (10 days) and higher rental income from QB2, QB3 and Wisma Technip. Excluding the one off gain from divestment of Quill Building 10 in FY15, net profit was down by 18.3% due to higher opex and finance cost.
• QoQ: Revenue grew by 4.8% due to additional income from Menara Shell and higher rental income from QB2 & QB3. However, opex and finance cost grew at higher pace resulting net income to contract by 12.2%.
• FY16: Revenue was higher (+14.4%) due to additional income from Platinum Sentral and Menara Shell as well as step-up rent adjustments for other properties. Nevertheless, bottom line grew slower at 10.8% due to higher opex and finance cost related to new properties.
• Overall occupancy rate improved to 98% (from 97.2%) after the acquisition of Menara Shell. Meanwhile, 87% of total lease expiry in FY16 (7% of total NLA) has been renewed.
• Despite the lacklustre overall office market, MQREIT’s office space will remain stable and well-guarded from its long WALE (5.8 years) with well-spread NLA expiry (14% and 26% expiring in FY17 and FY18, respectively).
• With the acquisition of Menara Shell concluded back in 22 December 2016, asset size has ballooned to RM2.27bn from RM837m in 2014.

Risks

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

Forecasts

• We incorporate the latest FY16 numbers and assumptions post-placement exercise resulting in slightly higher FY17 and FY18 bottom lines by 1.3% and 0.7%, respectively.

Rating

BUY ↔, TP: RM1.40 ↑

• We continue to like MQREIT given its high dividend yield (highest among REITs in our universe), stable assets in prime location of KL Sentral with high occupancy rate and healthy WALE profile. Its portfolio assets size has increased to RM2.2bn and is qualifying into bigger cap space.

Valuation

• TP revised higher to RM1.40 (from RM1.33) based on lower targeted yield of 6.2% (from 6.5%), 3SD below 1-year historical average yield spread between MQREIT and 10- year MGS.

Source: Hong Leong Investment Bank Research - 26 Jan 2017