MQREIT’s 1H20 Core Net Profit of RM38.9m (+8.4% YoY) Was Above Our and Consensus Estimates, Due to Lower-than-expected Total Expenses. Overall, the Improved Performance Was Due to New Tenancy and Lower Expenses. We Anticipate Resilient Earnings for FY20 From These New Tenants. We Increase Our Earnings by 10% for FY20-22 to Account for Lower Expenses and Contribution From New Tenancy. Maintain Our BUY Call With a Higher TP of RM0.85 (from RM0.79).

Above expectation. 2Q20 core net profit of RM19.1m (-3.6% QoQ, +16.0% YoY) brought 1H20 core net profit to RM38.9m (+8.4% YoY). The result was above our and consensus estimates, accounting for 59% and 57%, respectively. The positive deviation was due to lower-than-expected total expenses.

Dividend. Declared semi-annual dividend of 3.43 sen per unit (1H19: 3.43 sen) going ex on 01st September 2020.

QoQ. Total gross revenue edged down by 3.8% to RM40.1m mainly due to rental rebate given to retail tenants in Plaza Mont Kiara (PMK) and Platinum Sentral. Core net profit was lower by 3.6% inline with slightly lower revenue coupled with lower property operating expenses (-3.0%) and lower total expenses (-5.0%).

YoY. Top line rose by 3.4% owing to higher income contribution from Menara Shell, Tesco, Wisma Technip and Platinum Sentral from higher occupancies. As a result of the declining property operating expenses by 5.7% and lower total expenses (-5.8%) from lower finance cost (-8.3%), core net profit showed an increment by 16.0%.

YTD. Revenue increased by 2.1% mainly due to higher revenue generated from Menara Shell, Wisma Technip and Tesco. Core net profit increase of 8.4% came from lower property operating expenses (-2.5%) and lower total expenses (-4.3%).

Other updates. Overall occupancy rate increased marginally to 90.4% in 1H20 (FY19: 90%). MQREIT has granted rental assistance in 2Q in form of rental discount to its retailers in PMK (PMK contributed only about 3-4% of total revenue), and has no intention to give any further rebates. In 2020, 19% of MQREIT's total net lettable area (NLA) is due for renewal. 1% of these leases were renewed already in 1H20 while most of it will be due in the 4Q20. We believe chances of tenancy renewal are high due to nature of business of their tenants (big corporations and multinational companies like Shell, HSBC, DHL and etc.).

Outlook. We believe MQREIT is relatively shielded from Covid-19 and MCO/CMCO/RMCO impact due to its large exposure to office and miniscule exposure to retail unlike the other mall based REITs. Hence, we reckon that MQREIT will continue to register resilient earnings in 2H supported by their rental income contribution from their tenants. We note that the current office market outlook for office REITs remains lacklustre due to unabated oversupply of office in KL city. However, we believe MQREIT will be able to sustain its earnings, at least in the near term, due to their tenancy with big corporations and MNCs.

Forecast. We increase our earnings by 10% for FY20-22 to account for lower expenses and higher occupancies from its properties.

Maintain BUY, with a higher of TP: RM0.85 (from RM0.79) based on FY21 forward DPU on targeted yield of 8.1%, derived from its 2 years historical average yield spread of MQREIT and 10-year MGS. We like MQREIT for its attractive dividend yield of 8.8% (highest among REITs in our universe) and its relatively more resilient earnings amid Covid-19 given minimal retail exposure unlike other mall based REITs

Source: Hong Leong Investment Bank Research - 24 Aug 2020