Results

• Above expectations. 4Q17 normalised net profit of RM21.5m (QoQ: +0.6%; YoY: +60.8%) ended FY17 withRM88.1m (+48.8% YoY). The results were above our expectations but in line with consensus, accounting for 102.3% of ours and 98.7% of consensus FY estimates, respectively.

Deviations

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

Dividends

• Declared dividend of 4.16 sen, bringing YTD dividend to 8.39 sen (FY16: 8.38 sen) per unit.

Highlights

• YoY: Normalized net profit increased 60.8% on the back of additional revenue from the newly acquired Menara Shell and higher rental income from QB2, QB3 and Wisma Technip.
• QoQ: Remained flattish as lower property operating expenses were offset by higher finance cost.
• FY17: Normalized net profit increased 48.8% due to additional revenue from the newly acquired Menara Shell (full year impact as it was acquired in Dec 2016) and rental rate increases from QB2, QB3 and Wisma Technip.
• Overall occupancy rate remained healthy at 96.3%.
• Average debt to maturity has decreased slightly from 3.05 years to 2.79 years while average cost of debt (4.4% p.a.) was maintained. The gearing level of MQREIT remained unchanged at 37% which is still comfortably below the limit of 50%.
• Outlook: Despite the lacklustre overall office market, MQREIT’s office space will remain stable and well-guarded from its long weighted average term to expiry with well- spread NLA expiry (26% and 13% expiring in FY18 and FY19, respectively).

Risks

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

Forecasts

• Our FY18-19 earnings forecasts are raised by c.4% after incorporating lower property operating expenses assumption.

Rating

BUY ↔, TP: RM1.44 ↑

• 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 portfolio size allows MQREIT to enjoy greater operating efficiency arising from economies of scale.

Valuation

• TP is revised higher to RM1.44 (from RM1.42) after incorporating our latest earnings forecasts.
• Maintain BUY with unchanged targeted yield of 6.3%.

Source: Hong Leong Investment Bank Research - 29 Jan 2018