FY19 realised net income (RNI) of RM72.1m came in well within our and consensus expectations at 95% and 99%, respectively. FY19 dividend of 6.80 sen is also within (97%). FY20/Y21 will see minimal expiries of 18%/19% of NLA which is comforting given the glut of office space. Maintain FY20E RNI of RM76.5m and introduce FY21E RNI of RM77.6m. Maintain MARKET PERFORM with an unchanged TP of RM1.05 (based on an implied FY20E yield of 6.7%).

FY19 realised net income (RNI) of RM72.1m came in well within our and consensus expectations at 95% and 99%, respectively. FY19 GDPU of 6.8 sen per unit (which includes a non-taxable portion of 0.10 sen) is also within at 97% of our expected GDPU of 7.0 sen (7.0% gross yield).

Results’ highlights. YoY, top-line was down by 7% mainly from lower contributions from Platinum Sentral, Wisma Technip and QB5 due to tenant movements which resulted in lower portfolio occupancy of 90% (vs. 96%), and post the disposal of QB8 - DHL XPJ in 2QFY18. As a result, RNI was down by 13% on slightly lower NPI margin (-1.3ppt) on the back of weaker top-line. QoQ, top-line was up by 5%, likely on better rental rates for leases renewed in 4QFY19 and marginally better occupancy of 90% (vs. 89% in 3QFY19). This trickled down to bottom line which was up by 6% despite slightly higher property expenses and financing cost.

Outlook. FY20-21 will see 18-19% of net lettable assets (NLA) up for tenancy expiry amid an oversupply of office spaces in the Klang Valley. Despite concerns of tenant attritions, MQREIT has managed to renew 92% of leases up for renewal in FY19. Going forward, we are expecting flattish reversions for MQREIT’s assets and expect minimal capex of RM10m, mostly for maintenance.

Maintain FY20E RNI of RM76.5m and introduce FY21E RNI of RM77.6m. Our earnings are based on FY20-21E portfolio occupancy of 92-93% (from 90% currently) and low single-digit rental reversions. As a result, our FY20-21E GDPU stand at 7.0-7.1 sen (NDPU of 6.3-6.4 sen), which suggest gross yield of 7.0-7.1% (net yield of 6.3-6.4%), 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 +3.2ppt) due to the tough market conditions amid oversupply of office space. MQREIT is commanding decent gross yield of 7.0%, well above peers’ average gross yield of 5.7%, but we believe this is justifiable given concerns surrounding the oversupply in the office space.

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

Source: Kenanga Research - 20 Jan 2020