Results

• Reported 1HFY17 gross revenue of RM90.6m (+39% yoy) which translated to normalised net profit of RM45.2m (+47.7% yoy), accounting for 55.2% and 53.4% of HLIB and consensus full year forecasts, respectively.

Deviations

• Above expectations due to lower than expected property operating expenses.

Dividends

• DPU of 4.23 sen (1HFY16: 4.23 sen) was declared, representing a payout ratio of 95.4%.

Highlights

• YoY: Higher revenue (+38.4%) recorded on the back of additional revenue from the newly acquired Menara Shell and higher rental income from QB2, QB3 and Wisma Technip.
• QoQ: Net income declined 4.8% to RM22m due to lower revenue and higher property operating expenses.
• YTD: Revenue was higher (+39%) due to the newly acquired Menara Shell as well as step-up rent adjustments for other properties. Net income growth (+47.7%) is higher than revenue growth mainly due to slower growth in finance costs (+23.6%).
• Overall occupancy rate slightly reduced to 96.5% (from 97%) but still remained healthy. Meanwhile, c.36% of total lease expiry in FY17 (14% of total NLA) has been renewed.
• Outlook: Despite the lacklustre overall office market, MQREIT’s performance is expected to remain stable due to its healthy occupancy rate and long WALE (5.6 years) with well-spread NLA expiry (26% and 13% expiring in FY18 and FY19, respectively).

Risks

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

Forecasts

• Our FY17-19 earnings forecasts are raised by c.2% after incorporating lower property operating expenses assumption.

Rating

BUY ↔ , TP: RM1.48 ↑

• 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. The larger port folio size allowed MQREIT to enjoy greater operating efficiency arising from economies of scale.

Valuation

• TP is revised higher to RM1.48 (from RM1.45) after incorporating our earnings forecasts.
• Maintain BUY with unchanged targeted yield of 6.2%.

Source: Hong Leong Investment Bank Research - 14 Aug 2017