FY17 realised net income (RNI) of RM88.0m is well within our and market expectations at 96% and 99%, respectively. FY17 GDPU is also within at 8.39 sen (100%). FY18-19 will see minimal lease expiries of 28-15% on flattish to low single-digit reversions. Maintain FY18E CNP of RM94.2m and introduce FY19E CNP of RM96.7m. Maintain OUTPERFORM and TP of RM1.38, on FY18E GDPS of 8.40 sen and a +2.1ppt spread to our 10-year MGS target of 4.00%.

FY17 realised net income (RNI) of RM88.0m came in within our and consensus expectations at 96% and 99%, respectively. 4Q17 GDPU of 4.16 sen was declared, which includes a 0.11 sen non-taxable portion, bringing FY17 GDPU to 8.39 sen. This also met our FY17 target (100%) of 8.40 sen, implying 6.9% gross yield (6.2% net yield).

Results Highlights. YoY-Ytd, RNI increased by 49%, driven by top- line growth (+37%) from: (i) the acquisition of Menara Shell (in Dec 2016), and (ii) positive reversions from QB3, Wisma Technip and QB2. As a result, RNI margins improved by +4.0ppt as most cost items remained fixed, despite higher property operating expenses (+36%) and financing costs (+23%) from the acquisition of Menara Shell. However, EPU declined due to dilution post the placement in end FY16. QoQ, NPI was up by 1% on lower property operating expenses (-5%), but higher finance cost (+10%) and expenditure (+9%) weighed on bottom-line, causing RNI to be flat. There was also RM18.2m revaluation loss in 4Q17 from Platinum Sentral and QB5, likely due to increased tenant incentives.

Outlook. FY18-19E leases up for expiry are minimal at 28-15% of net lettable assets (NLA) which is preferable under current market condition where the office market is facing an oversupply situation, and risk of tenant attrition. As such, we are expecting flattish to low single-digit reversion in FY18-19. Additionally, we expect capex in FY18-19 of RM12-10m, mostly for maintenance. MQREIT’s disposal of QB8 is expected to be completed by 2Q18, but this is mostly neutral to FY18E CNP as we expect the net gains on disposal of 0.12 sen per unit to offset the loss of income, while the impact to our FY19 forecasts is negligible at <2% of RNI.

We maintain FY18E CNP of RM94.2m and introduce FY19E CNP of RM96.7m. Our FY18-19E GDPU of 8.40-8.40 sen (NDPU of 7.60-7.60 sen), suggest gross yields of 6.9-6.9% (net yields of 6.2-6.2%).

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 weighed down by 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 yield of 6.2%) vs. MREIT peers (>RM1b) under our coverage with an average 5.7% yield (net: 5.1%).

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

Source: Kenanga Research - 22 Jan 2018