FY16 realised net income (RNI) of RM59.2m met both our and market expectation at 100% and 102%, respectively. FY16 GDPU of 8.38 sen was also within expectation (100%). Maintain FY17-18E earnings of RM92.0-95.5m. Maintain OUTPERFORM but increase TP to RM1.36 (from RM1.28), based on FY17E GDPS of 8.40 sen and a lower spread of +2.00ppt (from +2.40ppt) to our 10-year MGS target of 4.20%.

FY16 realised net income (RNI) of RM59.2m came in within both our and consensus expectations at 100% and 102%, respectively. 4Q16 GDPU of 4.15 sen was declared which includes a 0.09 sen non-taxable portion, bringing FY16 GDPU to 8.38 sen. This also met our FY16E target (100%) of 8.40 sen, implying 6.4% yield

Results Highlights. YoY-Ytd, RNI was up by 10% mostly on positive top line growth of 14% from acquisition of Menara Shell in Dec 2016 and Platinum Sentral in Mar 2015, as well as positive reversions from other assets such as QB2, QB3 and Wisma Technip, and on the back of higher financing cost of (+15%) to part finance the acquisition of Menara Shell and Platinum Sentral. Despite higher RNI, GDPU was flattish due to dilution post the completion of the placement in end FY16. QoQ, RNI was down by 13% on flattish NPI due to higher cost incurred for repairs and maintenance, while higher financing cost (+12%) and expenditure arising mostly from administrative expense (+60%) dragged down bottom line.

Outlook. MQREIT’s FY17-18E leases up for expiry are minimal at 14.0- 26.0% of net lettable assets (NLA) which is preferable in current times where the office market is facing an oversupply situation, given the risk of tenants attrition. As such, we are expecting low single-digit reversions. Additionally, we expect minimal capex in FY17-18E of RM10-12m for maintenance. Menara Shell’s acquisition was completed in Dec 2016 and is expected to accrete fully in FY17 which we have accounted for.

Maintain FY17-18E earnings. We make no changes to our FY17- 18E earnings of RM92.0-95.5m. Our FY17-18E GDPU of 8.4-8.4 sen suggests gross yield of 6.4%.

Maintain OUTPERFORM but increase our TP to RM1.36 (from RM1.28) based on FY17E GDPS of 8.40 sen. We maintain our OUTPERFORM call but increase our TP to RM1.36 (from RM1.28) based on a lower spread to the 10-year MGS target of 4.20% to +2.00ppt (from +2.40ppt), implying a target yield of 6.2% vs. MREITs (>RM1b) under our coverage average of 5.5%. We are narrowing our spread as MREITs continue to trade higher as investors search for safe yield havens. However, our applied spread is above large cap MREITs (>RM1b) under our coverage (between +0.8ppt to +1.70ppt) as MQREIT is slightly smaller than large cap REITs, while the office segment may not be perceived well compared to retail and industrial due to oversupply issue. Risks to our call include bond yield expansions or compressions and weaker-than-expected rental reversions.

Source: Kenanga Research - 26 Jan 2017