MQREIT FY18 core net profit RM82.5m (-6.3% YoY) was within our expectations but below consensus. The decline was mainly due to lower revenue contribution from the disposal of QB8 along with lower occupancy from Platinum Sentral and Menara Shell, paired with higher finance costs. Looking ahead, MQREIT will be focusing on cost management and tenant retention to ensure sustainability of yield. We maintain our forecast; reiterate BUY call with unchanged TP of RM1.23 based on targeted yield of 6.9%.

Within expectations. FY18 revenue of RM173.4m (-3.7% YoY) translated into core net profit of RM82.5m (-6.3% YoY). The results were within our expectations but below consensus, accounting for 96% and 94%, respectively.

Dividend. Declared dividend of 3.85 sen, bringing FY18 dividend to 8.08 sen (FY17: 8.39 sen) per unit, marginally in line with our expectations.

QoQ/YoY. Revenue decreased to RM42.7m (QoQ: -1.4%; YoY: -4.5%) followed by a decline in core net profit to RM19.6m (QoQ: -4.7%, YoY: -8.8%). The reduction was mainly due to lower revenue contribution from Platinum Sentral and loss of revenue from QB8 – DHL XPJ (QB8) back in April 2018. However it was slightly mitigated by lower property operating expenses thanks to tighter control on costs.

FY18. Revenue for FY18 fell by 3.7% to RM173.4m. The lower revenue was due to (i) loss of revenue from QB8 after disposal in April 2018 and (ii) lower occupancy rate from Platinum Sentral and Menara Shell. Nevertheless, the fall was marginally mitigated by the reduction in property operating expense attributed to lower expenses incurred by some properties. Similarly, core net profit of RM82.5m showed a decrement of 6.3%. This was due to higher administrative expenses incurred which pertained 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 93% (3Q18: 94%). Average debt to maturity decreased from 2.73 years to 2.47 years, while average cost of debt maintained at 4.5%. The gearing level also maintained at 37.7%, still comfortably below the 50% limit.

Outlook. Going forward, management will be focusing on cost management and tenant retention. Also in FY19, with the expectations of a challenging office market, some properties will be scheduled for enhancement works; namely, Wisma Technip, QB5, Platinum Sentral and Menara Shell.

Forecast. Maintain as the Results Were Inline.

Maintain BUY, TP: RM1.23. We maintain our BUY call with TP of RM1.23 based on targeted yield of 6.9% which is derived from 2 years historical average yield spread of MQREIT and 10-year MGS. We continue to like MQREIT given its attractive dividend yield of 7.2% (highest among REITs in our universe), stable assets in prime location of KL Sentral with high occupancy rate

Source: Hong Leong Investment Bank Research - 18 Jan 2019