MQREIT 9M18 core net profit RM62.9m (-5.6% YoY) was below both ours and consensus expectations due to lower-than-expected revenue contribution. The decline was mainly due to lower revenue contribution due to disposal of QB8 along with lower occupancy from Platinum Sentral and and Menara Shell, and higher finance costs. Looking ahead, MQREIT will be focussing on cost management and tenant retention to ensure sustainability of yield. We reduce our FY18-20 forecast by 4%-6% to factor in lower revenue contribution. We reiterate BUY call with lower TP of RM1.23 based on targeted yield of 6.9%.

Below expectations. 9M18 revenue of RM130.7m (-3.5% YoY) translated into core net profit of RM62.9m (-5.6% YoY). The results were below ours and consensus expectations, accounting for 70.1% and 71.4%, respectively. This was mainly due to lower-than-expected revenue contribution.

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

QoQ/ YoY. Revenue fell to RM43.3m (QoQ: -0.3%; YoY: -3.5%) followed by a decline in core net profit to RM20.6m (QoQ: -3.3%, YoY: -3.7). The decline was mainly due to lower revenue contribution from Platinum Sentral and loss of revenue from QB8 – DHL XPJ (QB8). However it was slightly mitigated by lower property operating expenses thanks to tighter control on costs. Higher finance cost also contributed to the fall.

YTD. Revenue for 9M18 decreased by 3.5% to RM130.7m. The lower revenue was due to (1) loss of revenue from QB8 after disposal in April 2018; (2) lower occupancy rate from Platinum Sentral and Menara Shell. Nevertheless, the fall was slightly mitigated by the decrease in property operating expense attributable to lower expenses incurred by some properties. Likewise, core net profit of RM62.9m showed a decrement of 5.6%. This was due to higher administrative expenses incurred pertaining to the disposal of QB8 and increase in finance costs due to higher interest post OPR hike in January 2018.

Occupancy and gearing. Overall occupancy rate fell but remained healthy at 94% (2Q18: 96%). Average debt to maturity has increased slightly from 2.30 years to 2.73 years, followed by an increase in average cost of debt from 4.4% to 4.5%. The gearing level also increased slightly to 37.7% (2Q18: 37.3%), still comfortably below the 50% limit.

Outlook. Management has achieved approximately 71% renewal rate for its lease expiries due up to 3Q18, and are currently in advanced negotiations with tenants for the balance of leases due in 2H18. Similarly, management has successfully secured new leases with demand driving from IT, business consultancy, medical and retail sectors in Plaza Mont’ Kiara, Platinum Sentral as well as Menara Shell. Looking ahead, management will be focussing on cost management and tenant retention. We continue to like MQREIT given its attractive dividend yield of 7.9% (highest among REITs in our universe), stable assets in prime location of KL Sentral with high occupancy rate.

Forecast. We reduce our FY18-20 earnings forecasts by 4%, 5% and 6% respectively after factoring in lower revenue contribution.

Maintain BUY, TP: RM1.23. We maintain our BUY call with lower TP of RM1.23 (from RM1.29) based on targeted yield of 6.9% which is derived from 2 years historical average yield spread of MQREIT and 10-year MGS.

Source: Hong Leong Investment Bank Research - 28 Nov 2018