9MFY20 realised net income (RNI) of RM60.3m came in above our (83%), and consensus (81%), expectations as we were more conservative, expecting higher rental rebates for tenants. No dividends, as expected. Increase FY20-21E CNP by 7% each to RM78-82m on lower rebates and slightly better occupancy. Maintain OUTPERFORM with a higher TP of RM0.825 on attractive FY21E gross yield of 9.0% vs. large cap MREIT peers’ average of 5.4% despite earnings being more resilient than retail players which are struggling amidst the pandemic.

9MFY20 realised net income (RNI) of RM60.3m came in above our and consensus expectations at 83% and 81%, respectively, as 9MFY20 rental rebates were not as high as previously anticipated. No dividends, as expected.

Results’ highlights. YoY-Ytd, top-line was up by 3% on higher revenue generated from Menara Shell, Wisma Technip, and Tesco, Penang. Efficient portfolio management led to lower property operating expense (-3%) coupled with lower finance cost (-9%) which allowed RNI to increase by 13%. QoQ, top-line was up by 4.9% as 3Q saw less rental rebates required. As a result, RNI was up by 13%. Gearing remained stable at 0.38x which is below MREITs’ gearing limit of 0.60x currently.

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. Positively, the group has renewed 11% of the 19% of leases up for renewal in FY20 while asset occupancy remains stable at 90.5% (vs. 90.4% in 2QFY20). The group remains cautious of the Covid-19 situation which will place pressure on the office market and will continue to focus on tenant retention and cost optimisation for now.

Increase FY20-21E CNP by 7% each to RM78-81m (from RM73- 76m) on slightly improved occupancy to 91-93%% (from 90-91%) in FY20-21) and lower-than-expected rental rebates in 2HFY20. As a result, we increase FY20-21E GDPU/NDPU to 6.9-7.1 sen / 6.2-6.4 sen (from GDPU/NDPU 6.4-6.7 sen / 5.8-6.0 sen) implying attractive gross yield of 8.7-9.0% (net yield of 7.8-8.1%).

Maintain OUTPERFORM on a higher Target Price of RM0.825 (from RM0.800) based on a higher FY21E GDPU of 7.1 sen (from 6.7 sen) and an unchanged spread of +5.8ppt @ +1.5SD (highest spread among MREITs under coverage of +1.5 to 5.4ppt) to the 10-year MGS target of 2.80%. 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 than retail peers as its results and tenant retention have been stable thus far. Gross yields are attractive at 9.0% well above MREITs under our coverage (large cap retail and office MREITS) with an average of 5.4%, while MQREIT has proven to be more stable that its peers given that it operates within the formidable office segment.

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

Source: Kenanga Research - 12 Nov 2020