1Q17 realised net income (RNI) of RM23.2m was well within our and market expectations at 25% and 26%, respectively. No dividends, as expected. Maintain FY17- 18E earnings of RM92.0-95.5m. Maintain OUTPERFORM and TP to RM1.36, based on FY18E GDPS of 8.40 sen and a +2.00ppt spread to our 10-year MGS target of 4.20%.

1Q17 realised net income (RNI) of RM23.2m came in well within our and consensus expectations at 25% and 26%, respectively. No dividends, as expected.

Results Highlights. YoY-Ytd, RNI was up by 52%, primarily driven by top-line growth (+40%) from; (i) the acquisition of Menara Shell in Dec 2016, and (ii) positive reversions from QB3, Wisma Technip and QB2. This was on the back of higher financing cost (+24%) to part finance the acquisition of Menara Shell. Despite higher RNI, EPU was slightly lower due to dilution post the completion of the placement in end FY16. QoQ, top-line was up by 34% due to similar reasons mentioned above, while NPI margins improved by +4.0ppt to 79% due to higher cost incurred in 4Q16 for repairs and maintenance. Additionally, lower expenditure (-14%) due to lower administrative expense (-96%) helped RNI improve by a solid 74%.

Outlook. 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 tenant attrition. As such, we are expecting low single-digit reversions. Additionally, we expect minimal capex in FY17-18 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 of RM92.0-95.5m. Our FY17-18E GDPU of 8.4-8.4 sen suggests gross yields of 6.4%.

Maintain OUTPERFORM and TP of RM1.36 based on FY18E GDPS of 8.40 sen. Post rolling forward our valuation to FY18E (from FY17E), we make no changes to our TP as we expect flattish DPU YoY. To recap, we expect a slightly lower dividend pay-out of 96% in FY18 (vs. 98% in FY17), which is closer to historical pay-out ratios of 94-96%. Our TP is based on a +2.00ppt spread to the 10-year MGS target of 4.20%, implying a target yield of 6.2% vs. MREITs (>RM1b) under our coverage average of 5.5%. 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. However, despite our conservative valuations, we are comfortable with our OUTPERFORM call as MQREIT is commanding attractive gross yields of 6.5% vs MREIT peers (>RM1b) under our coverage average of 5.8%.

Risks to our call include bond yield expansions or compressions and weaker-than-expected rental reversions.

Source: Kenanga Research - 5 May 2017