9MFY19 realised net income (RNI) of RM53.5m came in within our and consensus expectations at 71% and 72%, respectively. No dividend was declared as expected. FY19- 20 will see 19-18% of NLA tenancy expiring amid a glut in the office space. Maintain FY19-20E RNI of RM76-77m. Maintain MARKET PERFORM on an unchanged TP of RM1.05 (based on an implied FY20E yield of 6.7%).

9MFY19 realised net income (RNI) of RM53.5m came in within our and consensus expectations at 71% and 72%, respectively. No dividend was declared, as expected.

Results’ highlights. YoY, top-line was down 8% mainly from lower contributions from Platinum Sentral, Wisma Technip and QB5, possibly due to tenant movements which resulted in lower portfolio occupancy of 89% (vs. 96%), and the loss of revenue from the disposal of QB8 - DHL XPJ in 2QFY18. All in, bottom-line was down by 15% on slightly lower NPI margin (-1.3ppt) on the back of weaker top-line, while financing cost remained flattish. QoQ, top-line was up slightly by 3% possibly on better rental rates for leases renewed in 3QFY19 as occupancy remained flat at 89%. This cascaded straight to the bottom-line which was up by 7% as property expenses and financing cost remained flat.

Outlook. FY19-20E will see 19-18% of net lettable assets (NLA) up for tenancy expiry amid an oversupply of office spaces in the Klang Valley. While there is a risk of tenant attritions, MQREIT has managed to renew 93% of leases up for renewal in 3QFY19. Going forward, we are expecting flattish reversions for MQREIT’s assets and expect minimal capex of RM12-10m, mostly for maintenance.

Maintain FY19-20E RNI of RM76-77m. Our earnings are based on FY19-20 portfolio occupancy of 90-92% and flattish rental reversions. As a result, our FY19-20E GDPU stand at 7.0-7.0 sen (NDPU of 6.3-6.3 sen), which suggest gross yield of 6.9-6.9% (net yield of 6.2-6.2%), respectively.

Maintain MARKET PERFORM with Target Price of RM1.05. Our TP is based on FY20E GDPU of 7.0 sen on an unchanged +3.2ppt spread to the 10-year MGS target of 3.40%. Our target yield spread for MQREIT is the highest compared to comparable MREITs under our coverage (+1.3ppt to +3.4ppt) due to the tough market conditions amid oversupply of office space. Although MQREIT is commanding decent gross yield of 6.9%, well above its peers’ average gross yield of 5.6%, we believe this is justifiable given the abovementioned concerns surrounding office assets. We maintain our Market Perform call.

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

Source: Kenanga Research - 26 Nov 2019