1HFY20 realised net income (RNI) of RM38.9m (+8% YoY Ytd) came in above our (65%), and consensus (57%), expectation, as we had over-estimated the rental rebates for tenants in 2QFY20. 1HFY20 dividend of 3.43 sen is also above expectation (at 63%). Hence, we increase FY20-21E CNP by 22-3% to RM73-76m on improved occupancy and lower rebates. Upgrade to OUTPERFORM (from MP) with a higher TP of RM0.800 (from RM0.700). MQREIT offers investors a potential total return of 14% based on our revised estimates.

1HFY20 realised net income (RNI) of RM38.9m is above our expectation at 65% and consensus at 57% as 2QFY20 rental rebates to tenants were not as high as previously anticipated. 1HFY20 GDPU of 3.43 sen per unit (which includes a non-taxable portion of 0.09 sen) is also above at 63% of our FY20E GDPU of 5.4 sen.

Results’ highlights. YoY-Ytd, top-line was up by 2% on higher revenue generated from Menara Shell, Wisma Technip, and Tesco. As a result of lower property operating expense (-3%) and finance cost (- 6%), RNI was up by 8%. However, DPU was flat at 3.43 sen as the group aims for prudent cash management in light of Covid-19 uncertainties. QoQ, top-line was down by 3.8% on marginally lower gross revenue recognised during the quarter due to rental rebates. RNI declined by 3.6% despite mildly lower operating expense (-3%) and finance cost (-6.6%)

Outlook. FY20-21 will see minimal lease expiries of 19-21% of net lettable assets (NLA) while the issue of oversupply of office spaces in the Klang Valley remains. The group remains cautious of the Covid-19 situation but does not expect further rental rebates in 2HFY20 as business operations are improving. Portfolio occupancy remains stable at 90.4% in 2QFY20.

Increase FY20-21E CNP by 22-3% to RM73-76m on improved occupancy of 90-91% (from 87-90% in FY20-21E) and lower-than expected rental rebates in 2QFY20. FY20-21E GDPU/NDPU to 6.4-6.7 sen / 5.8-6.0 sen, (from GDPU/NDPU 5.5-6.7 sen / 4.9-6.1 sen) on improved earnings but a lower pay-out ratio of 95% (from 99%) as we believe MQREIT prefers to be prudent with cash management, implying gross yields of 8.5-8.8% (net yield of 7.7-8.0%).

Upgrade to OUTPERFORM (from MP) with a higher Target Price of RM0.80 (from RM0.70). Our TP is based on FY21E GDPU of 6.7 sen but on a lower spread of +5.8ppt @ +1.5SD (from +6.3ppt @ +2SD) on a lower 10-year MGS target of 2.80% (from 3.30%). Our target yield spread is in line with the sector at +1.0 to +2.0SD to historical levels as we remain cautious under this Covid-19 pandemic, but we believe MQREIT warrants slightly better spreads given that 1HFY20 saw minimal earnings weakness contrary to our earlier poor expectation. We also do not expect further rental rebates in 2HFY20, barring any unforeseen circumstances. At current levels, the gross yields are attractive at 8.8% vs. MREITs under our coverage with an average of 5.3%, given the stability of the office segment compared to retail and hospitality segments.

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

Source: Kenanga Research - 17 Aug 2020