Quill Capita Trust (QCT) reported a net profit of MYR8.1m, flat y-o-y. No dividend was declared, as distributions are made semi-annually.  Revenue dropped 3.1% y-o-y, attributed to the higher vacancy rate in 1QFY13. We believe that rental rates for office space will continue to be under pressure, possibly leading to flattish DPU growth for QCT going forward. Maintain NEUTRAL with unchanged fair value of MYR1.27.  

♦  Broadly in line. Quill Capita Trust’s (QCT) 1QFY13 revenue of MYR17.2m (-3.1% y-o-y, flat q-o-q) and realised net income of MYR8.1m (flat y-o-y; +2.4% q-o-q) was broadly in line with expectations. No dividend was declared as QCT only declares its dividend semi-annually.

♦  Earnings growth hampered by increased vacancies.  The y-o-y 3.1% drop in revenue and flat y-o-y net profit growth was mainly attributed to the higher y-o-y vacancy rate. We do note, however, that the loss of income has been somewhat mitigated by the kick-in of positive rental reversions in some of its assets. On a positive note, QCT was able to renew about 6% or about 77k sqf of its total net lettable area (NLA) in 1QFY13.  

♦  Capital management. QCT’s gearing remained stable at 36%, with theaverage cost of debt at 4.32% during the quarter. QCT has also obtained a commitment from a financial institution for the refinancing of its loan tranche due in Sept, thus minimising its refinancing risk.  

♦  Limited near-term upside. Rental rates for Klang Valley office space will continue to be under pressure, given the influx of about 26m sf new office space over the next few years. Nonetheless, given QCT’s strong track record and with its reputable tenants, we believe that it would still be able to sustain its DPU growth over the near term, albeit at a flattish rate.

♦  Forecasts. No changes to forecasts for now.

♦  Maintain Neutral. Our DDM-based fair value is unchanged at MYR1.27. We reiterate that investors should stay cautious, given the flattish DPU growth and underlying downside risk. We continue to prefer retail-focused MREITs such as Pavilion REIT and Sunway REIT for exposure in the MREIT sector.

Source: RHB