MQREIT has proposed to dispose Quill Building 5 (QB5) in Cyberjaya to Deriv Services Sdn Bhd (DSSB) for a cash consideration of RM45m. We are positive on the disposal as it unlocks the value of the property at 1.12x BV which further fortifies its balance sheet. Our pro-forma calculation implies that net gearing would decrease to 36.9% post disposal, from 38.2% as at 3QFY20 assuming all the proceeds will be used to pay borrowings. The building has not been contributing to MQREIT since April 2019, hence, there is no impact on the top line of the company. We maintain our forecast for now pending the completion of disposal. Maintain our BUY call with an unchanged TP of RM0.96.

NEWSBREAK

MQREIT has proposed to dispose Quill Building 5 (QB5) in Cyberjaya to Deriv Services Sdn Bhd (DSSB) for a cash consideration of RM45m. The building is currently vacant and has not been contributing to MQREIT’s earning since April 2019. The disposal is expected to be completed in 2QFY21 pending relevant approvals.

QB5 is a 5 storey office building with 1 level of sub-basement and 1 ½ level of a basement car park with gross floor area of 227k sq. ft. and net lettable area of 82k sq. ft. The property used to contribute c.RM3.5m annually (3-4% of top line).

HLIB’s VIEW

Positive on the news. We are positive on the disposal as it unlocks the value of the property at 1.12x BV which further fortifies its balance sheet. The proceeds will be used to pare down its borrowings, asset enhancement initiatives, investments in other yield accretive properties and working capital purposes. Our pro-forma calculation implies that net gearing would decrease to 36.9% post disposal, from 38.2% as at 3QFY20 assuming all the proceeds will be used to pay borrowings. Other than that, we reckon that the selling price of RM45m is also fair as the market value of QB5 is RM40m as appraised by independent valuer on 15 Sept 2020.

Financial impact. The building has not been contributing to MQREIT since April 2019, hence, there is no impact on the top line of the company. However, assuming that all the proceeds will be used to pay the existing borrowing, the reduction in borrowings from this proposed exercise is expected to result in an interest savings of c.RM2m p.a. (c. 2% increase in bottom line annually).

Forecast. We keep our earnings forecast unchanged for now as management has not finalise what they will do with the proceeds as yet.

Maintain BUY, with an unchanged of TP: RM0.96 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 8.6% (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 - 13 Nov 2020