9M17 realised net income (RNI) of RM66.6m is well within our and market expectations. No dividends, as expected. FY17-18E will see minimal lease expiries of 14-26%. We make no changes to FY17-18E earnings of RM92.0-95.5m. Maintain OUTPERFORM and TP of RM1.38, based on FY18E GDPS of 8.40 sen and a +2.1ppt spread to our 10-year MGS target of 4.00%.

9M17 realised net income (RNI) of RM66.6m came in within our and consensus expectations at 72% and 74%, respectively. No dividends, as expected.

Results Highlights. YoY-Ytd, RNI increased by 45%, driven by top- line growth (+39%) from: (i) the acquisition of Menara Shell (in Dec 2016), and (ii) positive reversions from QB3, Wisma Technip and QB2, and QB5. This was despite higher property expenses (+43%) and financing costs (+23%) to part finance the acquisition of Menara Shell. Although RNI saw robust growth, EPU declined due to dilution post the placement in end FY16. QoQ, top-line declined by 1% likely on slightly lower occupancy or rental rates, while RNI margin was down (-1.0ppt) on higher property operating expense (+4%), causing RNI to decline by 3%.

Outlook. FY17-18E leases up for expiry are minimal at 14.0-26.0% of net lettable assets (NLA) which is preferable under 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.

We maintain FY17-18E earnings of RM92.0-95.5m. Our FY17-18E GDPU of 8.4-8.4 sen (NDPU of 7.6-7.6 sen), suggest gross yields of 6.6-6.6% (net yields of 6.0-6.0%).

Maintain OUTPERFORM and TP of RM1.38 based on FY18E GDPS of 8.40 sen. Our TP is based on a +2.1ppt spread to the 10-year MGS target of 4.00%, implying a target yield of 6.1% vs. MREITs (>RM1b) under our coverage with an average of 5.4%. Our applied spread is above large cap MREITs (>RM1b) under our coverage (between +0.8ppt to +1.80ppt) 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 6.6% (net yields of 6.0%) vs. MREIT peers (>RM1b) under our coverage average of 5.8% (net yields of 5.2%).

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

Source: Kenanga Research - 20 Nov 2017