MQREIT 1Q18 core net profit RM21.0m (-2.3% QoQ, -9.3% YoY) was broadly in line with our expectation and consensus. The reduction was driven by a decline in revenue, higher operating expenses & administrative expenses but slightly mitigated by lower finance costs. We lower our FY18-20 earnings by 2% followed by a decrease in FY18-20 DPU by 5% as we take into account the completion for the disposal of QB8-DHL (XPJ). We maintain BUY call with lower TP of RM1.40 (from RM1.44) based on unchanged targeted yield of 6.4%

Within expectations. 1Q18 gross revenue of RM44.0m (-1.4% QoQ, -3.3% YoY) translated into core net profit of RM21.0m (-2.3% QoQ, -9.3% YoY). The results were broadly in line with ours and consensus expectations, accounting for 22.8% and 23.2%, respectively.

Deviation. We deem it to be in line as we feel the administrative expenses would normalise in the coming quarters.

Dividend. None as dividend is usually payable semi-annually.

QoQ. Total gross revenue declined by 1.4% to RM44.0m (from RM44.7m in 4Q17), following a decrease in core net profit at RM21.0m. The reduction was caused by lower revenue contribution and higher administrative expenses pertaining to the disposal of QB8-DHL (XPJ). However, this was slightly offset by the decrease in finance costs for the quarter.

YoY. Core net profit declined by 9.3% at RM21.0m. The was driven by (1) lower revenue contribution, mainly from Platinum Sentral and Menara Shell, (2) increase in routine property operating expenses, (3) higher administrative expenses related to the proposed disposal of QB8-DHL (XPJ). This is slightly cushioned by lower finance costs due to lower amortisation of transaction costs incurred.

Occupancy and gearing. Overall occupancy rate remained healthy at 96.2% (4Q17: 96.3%). Average debt to maturity has decreased slightly from 2.79 years to 2.55 years, while average cost of debt maintained at 4.4%. The gearing level increased slightly to 38% (4Q17: 37%), which is still comfortably below the 50% limit.

Outlook. Despite the lacklustre overall office market, MQREIT’s office space will remain relatively stable and well-guarded by its long weighted average term to expiry with well-spread NLA expiry. To date, management has successfully completed 81% renewals due in 1Q18. We continue to like MQREIT given its attractive dividend yield of 8.2% (highest among REITs in our universe), stable assets in prime location of KL Sentral with high occupancy rate and healthy WALE profile.

Forecast. Although the results were broadly in line, we take this opportunity to adjust our FY18-20 earnings marginally lower by 2% to account for the completion of the disposal of QB8-DHL (XPJ) building. As a result, our FY18-20 DPS forecast is also reduced by 5%.

Maintain BUY, TP: RM1.40. While we maintain our BUY call, our TP is lowered from RM1.44 to RM1.40 following the lowered DPU projection. Our TP is based on FY18 targeted yield of 6.4% which is derived from 1SD below 2 years historical average yield spread of MQREIT and 10-year MGS.

Source: Hong Leong Investment Bank Research - 18 May 2018