1H17 realised net income (RNI) of RM45.2m was well within our and market expectations at 49% and 50%, respectively. 1H17 dividends of 4.23 sen was also within (50%). Maintain FY17-18E earnings of RM92.0-95.5m. Rating maintained at OUTPERFORM along with TP of RM1.41, based on FY18E GDPS of 8.40 sen and a +2.00ppt spread to our 10-year MGS target of 4.00%.

1H17 realised net income (RNI) of RM45.2m came in well within our and consensus expectations at 49% and 50%, respectively. 1H17 GDPU of 4.23 sen per unit (which includes a non-taxable portion of 0.08 sen) was also within expectations at 50% of our FY17E GDPU of 8.4 sen (6.4% gross yield).

Results Highlights. YoY-Ytd, RNI was up by 48%, spearheaded by top-line growth (+39%) from: (i) the acquisition of Menara Shell in Dec 2016, and (ii) positive reversions from QB3, WismaTechnip and QB2. This was despite higher financing cost (+24%) to part finance the acquisition of Menara Shell. Although RNI saw strong growth, EPU was slightly lower due to dilution post the completion of the placement in end FY16, while DPU was flattish at 4.23 sen. QoQ, top-line was down mildly by 1% likely due to slightly lower occupancy on tenant renewals, while RNI margins declined (-1.9ppt) due to higher property operating expense (+8%) likely on repairs and maintenance, causing RNI to decline by 5%.

Outlook. FY17-18E leases up for expiry are minimal at 14.0-26.0% of net lettable assets (NLA) which are 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. The acquisition of Menara Shell was completed in Dec 2016 and is expected to accrete fully in FY17 which we have accounted for in our earnings model.

Maintain FY17-18E earnings of RM92.0-95.5m. Our FY17-18EGDPU of 8.4-8.4 sen (NDPU of 7.6-7.6 sen), suggests gross yields of 6.4-6.4% (net yields of 5.7-5.7%).

Maintain OUTPERFORM and TP of RM1.41 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 4.00%, implying a target yield of 6.0% vs. MREITs (>RM1b) under our coverage with an 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 assets 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 - 14 Aug 2017