1H18 realised net income (RNI) of RM42.3m is well within our and market expectations at 47% and 48%, respectively. 1H18 dividend of 4.23 sen is also within (51%). FY18-19 will see minimal lease expiries of 28-15%. Maintain FY18-19E CNP of RM90.4-90.7m. Maintain MARKET PERFORM and TP of RM1.10 as most positives have been priced in.

1H18 realised net income (RNI) of RM42.3m came in within both our and consensus expectations at 47% and 48%, respectively. 1H18 GDPU of 4.23 sen per unit (which includes a non-taxable portion of 0.34 sen) was also within expectations at 51% of our FY18E GDPU of 8.1 sen (7.1% gross yield).

Results Highlights. YoY-Ytd, top-line was down by 4% mainly from lower revenue generated from Platinum Sentral and Menara Shell, likely due to tenant incentives as well as loss of revenue as the disposal of QB8 - DHL XPJ was completed in 2Q18. As a result of marginally higher property expenses (+1%) for some properties, and post excluding one-off gains on disposal for QB8, RNI declined by 7% to RM42.3m. QoQ, top-line was down by 1%, likely due to similar reasons mentioned above. However, RNI margins improved by 1.0ppt to 49% due to lower expenditure (-30%) from lower administrative expenses, despite higher property expenses (+3%) and financing cost (+3%). As a result, RNI was up by 1%.

Outlook. FY18-19E leases up for expiry are minimal at 28-15% of net lettable assets (NLA) which are 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 mildly negative reversion in FY18-19. We expect capex of RM12-10m in FY18-19, mostly for maintenance. MQREIT’s disposal of QB8-DHL was completed in mid-April 2018, but this is mostly neutral to FY18E CNP as we expect the net gains on disposal of 0.2 sen per unit to offset the loss of income, while the impact to our FY19 forecast is negligible at <2% of RNI.

Maintain FY18-19E CNP of RM90.4-90.7m. Our FY18-19E GDPU of 8.30-8.20 sen (NDPU of 7.50-7.40 sen), suggest gross yields of 7.1- 7.0% (net yields of 6.4-6.3%).

Maintain MARKET PERFORM and TP of RM1.10. We maintain our +3.3ppt spread to the 10-year MGS target of 4.20%, based on FY18E GDPS of 8.30 sen. Our applied spread is +0.5SD above historical average to serve as a buffer for near-term fluctuations to the MGS on oversupply issues and interest rate hikes, but we may look to remove this going forward once confidence returns to MREITs’ valuations. MQREIT is commanding fairly decent gross yield of 7.1%, which is closer to our target yield of 7.5%, but above MREIT peers’ average gross yield of 6.0%. However, we are comfortable with our call as we opt to be conservative on the sector and have priced in most downside risks into MQREIT’s earnings and valuations due to tough market conditions in the office space on concerns of oversupply, while most positives if any have been accounted for in our estimates.

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

Source: Kenanga Research - 09 Aug 2018