MQREIT is selling its industrial asset Quill Building 8 – DHL XPJ (QB8) to Transmark Corporation Sdn Bhd for a cash consideration of RM28m, and for a net gain on disposal of RM1.28m. We were surprised but are mainly neutral on the impact from the disposal as the quantum is negligible as net gains from the disposal offset the loss in income from QB8. We lower FYE18 Core Net Profit by 1%. Maintain OUTPERFORM and TP of RM1.38.

Disposal of QB8 for RM28m. MQREIT has entered into a SPA to dispose its industrial asset, Quill Building 8 – DHL XPJ to Transmark Corporation Sdn Bhd for a cash consideration of RM28m, which is at a slight premium to its book value of RM25m, while the Group expects a net gain on disposal of RM1.28m. QB8 is a single-storey detached warehouse with a three-storey office building located in Shah Alam. The disposal is expected to be completed by 2Q18.

Surprised but neutral. We were surprised as we did not expect any disposals in the near term due to MQREIT’s stable portfolio. We believe the rationale is to unlock value to fund ongoing asset enhancement initiatives (AEI’s) and lighten balance sheet to possibly make way for future acquisitions. All in, we are neutral on impact from the disposal as the affect to earnings in FY18 is negligible. The net gains on disposal of RM1.28m offset the loss in income from QB8 in FY18, as QB8 only makes up <2% of RNI on an annualised basis.

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 capex in FY17-18 of RM10-12m for maintenance.

We maintain FY17E CNP, but lower FY18E CNP by 1% to RM94.2m post accounting for the loss of income from QB8, as gains from asset disposals is regarded as non-core earnings. Our FY18 core EPU is lowered to 8.7 sen (from 8.8 sen). However, our DPU is unchanged as we expect the net gains on disposal of 0.12 sen per unit to offset the loss of income. Maintain FY17-18E GDPU of 8.4-8.4 sen (NDPU of 7.6- 7.6 sen), implying gross yields of 6.9-6.9% (net yields of 6.2-6.2%). Post the disposal, we expect FY18 gearing to decrease marginally to 0.38x (from 0.39x).

Maintain OUTPERFORM and TP of RM1.38 based on FY18E GDPS of 8.40 sen. We maintain our +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 is being weighed down on perceptions of an oversupply situation (vs. retail and industrial assets). However, despite our conservative valuations, we are comfortable with our OUTPERFORM call as MQREIT is commanding attractive gross yields of 6.9% (net yields of 6.2%) vs. MREIT peers (>RM1b) under our coverage with an average of 5.7% (net yield of 5.1%).

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

Source: Kenanga Research - 09 Jan 2018