MQREIT’s 9M20 Core Net Profit of RM60.3m (+12.8% YoY) Was Above Our and Consensus Estimates, Due to Lower-than-expected Total Expenses and Higher Rental Income From Some of the Properties. Overall, the Improved Showing Came on the Back of New Tenancy and Lower Opex. We See Resilient Earnings for FY20 From These New Tenants. We Increase Our Earnings by 5-7% for FY20-22 to Account for Lower Expenses and Contribution From New Tenancy. Maintain Our BUY Call With a Higher TP of RM0.96 (from RM0.92).

Above expectation. 3Q20 core net profit of RM21.5m (+12.6% QoQ, +21.8% YoY) brought 9M20’s sum to RM60.3m (+12.8% YoY). The result was above our and consensus estimates, accounting for 82% and 81%, respectively. The positive deviation was due to lower-than-expected total expenses and higher rental income from some of the properties.

Dividend. None as Dividend Is Usually Payable Semi-annually

QoQ. Gross revenue was up by 4.9% mainly due new occupancies in Menara Shell as well as higher car park income in Plaza Mont Kiara. Core net profit increased 12.6% from the lower finance costs (-6.6%) and administrative expenses (-30.2%)

YoY. Top line rose by 5.4% owing to better income contribution from Menara Shell, Wisma TechnipFMC and Tesco from higher occupancies. As a result of the declining property operating expenses by 4.3% along with lower total expenses (-10.2%) and finance cost (-14.6%), core net profit showed an increment by 21.8%.

YTD. Revenue increased by 3.2% mainly due to higher revenue generated from Menara Shell, Wisma TechnipFMC and Tesco. The 12.8% increase in core net profit came from lower property operating expenses (-3.1%) and total expenses (-6.3%). The lower total expenses was mainly driven by a lower finance cost (-8.7%) and administrative expenses (-4.1%). MQREIT has benefitted from the low interest rate environment as 54% of the total borrowings are on floating rate.

Other updates. Overall occupancy rate increased marginally to 90.5% in 9M20 (FY19: 90%). As at 3Q 2020, lease negotiations for approximately 241k sq ft were concluded with 216k sq ft renewed while 25ksq ft not renewed. This translates to a total renewal rate to 90% as at 3Q 2020 with a positive rental reversion. About 130k sq ft of leases is due in 4Q and 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 will continue to register resilient earnings in 4Q supported by stable occupancy across its assets. 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 5-7% for FY20-22 to account for lower expenses and higher occupancies from its properties.

Maintain BUY, with a higher of TP: RM0.96 (from RM0.92) based on FY21 forward DPU on targeted yield of 7.6%, derived from its 2 years historical average yield spread of MQREIT and 10-year MGS. We like MQREIT for its attractive dividend yield of 9.0% (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 - 12 Nov 2020