Quill Capita Trust’s (QCT) outlook continues to remain bleak. Its high exposure  to  the  office  segment  (63%  of  total  asset  value)  renders  it vulnerable  to  softening  growth  in  office  rental  rates.  The  prolonged vacancy  of  Quill  Building 10  is  also  a  threat  to  its earnings  in  the  long term.  Given  the  dearth  of  catalysts  and  underlying  downside  risks,  we aintain our SELL call on QCT. 
 
  Broadly  in  line.  Quill  Capita  Trust’s  (QCT)  2QFY13  net  profit  of MYR8.9m  (-2.8%  y-o-y,  +9.8%  q-o-q)  brought  its  1HFY13  net  profit  to MYR17.0m, down 1.3% y-o-y. This was broadly in line with expectations. The trust declared a 1HFY13 dividend of 4.10 sen, which is flat y-o-y but still on track to meet our target.

  Plagued  by  rising  vacancies.  Y-o-y  revenue  continued  to  decline  as QCT has yet to secure a tenant for Quill Building 10, which has remained empty  since  its  previous  tenant  vacated  the  building  in  Apr  2012. However, this loss of income was somewhat mitigated by the kicking in of  positive  rental  reversion  in  some  of  its  assets.  YTD,  QCT  has  only managed  to  renew  about  6%  out  of  the  29%  of  total  net  lettable  areas (NLA) due to expire this year. Given the softening growth in office rental rates, we expect its overall rental growth to remain flat, especially given its large exposure to the office space segment (63% of total asset value).

  Capital  management.  QCT’s gearing remained stable at 36% while  its average cost of debt stood at 4.32% during the quarter. The REIT is also relatively shielded from interest rate risks, as all of its debts are on fixed rates rather than floating rates.

  Risks.  The  risks  to  our  SELL  call  are:  i)  a  fall  in  bond  yields;  and  ii) better-than-expected rental rates for offices going forward.

  Maintain SELL. We maintain our SELL call on QCT, with an unchanged FV  of  MYR1.10.  The  medium  term  outlook  for  the  REIT  remains  murky due  to  the  current  oversupply  of  office  space.  In  addition,  the  rise  in  bond yields has taken some shine off the REIT sector.

Source: RHB