9M18 realised net income (RNI) of RM62.9m is within our and market expectations at 70% and 71%, respectively. No dividends, as expected. FY18-19 will see minimal lease expiries of 29-15% of NLA. Maintain FY18-19E CNP of RM90- 91m. Maintain MARKET PERFORM and TP of RM1.10 as most positives have been priced in.

9M18 realised net income (RNI) of RM62.9m came within both our and consensus expectations at 70% and 71%, respectively. No dividends, as expected.

Results Highlights. YoY-Ytd, top-line was down by 3% mainly from lower rentals at Platinum Sentral and Menara Shell, likely due to tenant incentives, as well as loss of revenue from the disposal of QB8 - DHL XPJ, which was completed in 2Q18. However, RNI declined by 6% on: (i) marginally higher financing cost (+1%), and (ii) post excluding one- off gains on disposal for QB8. QoQ, top-line was flat, but RNI declined by 3% on: (i) higher property expenses (+23%) from administrative expenses, (ii) slight increase in financing cost (+1%), and (iii) excluding one-off gains on disposal for QB8 of RM2.2m.

Outlook. FY18-19E leases up for expiry are minimal at 29-15% of net lettable assets (NLA) which are decent under current market condition, which is facing an oversupply situation, and risk of tenant attrition. However, MQREIT has secured 71% of leases up for expiry in FY18 thus far. For FY18-19, we are expecting flattish to mildly negative reversion and capex of RM12-10m, 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 7.7- 7.6% (net yields of 7.0-6.8%).

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 FY19E GDPS of 8.20 sen. MQREIT is commanding fairly decent gross yield of 7.6%, which is close to our target yield of 7.5%, but above MREIT peers’ average gross yield of 6.3%. 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 on concerns of oversupply in the office space, 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 - 28 Nov 2018