Quill Capita Trust is undergoing due diligence in relation to a  proposed exercise  with  Malaysian  Resources  Corp.  Barring  unforeseen circumstances,  a  deal  may  be  finalised  by  early  4Q14,  with  the  latter emerging  as  its  largest  unitholder.  Judging  from  its  intent  to  buy CapitaLand  Group’s  entire  stake  in  the  trust,  we  could  see  the Singaporean firm exiting the REIT. Maintain NEUTRAL for now.

• Ongoing  due  diligence  for Malaysian  Resources  Corp  deal.  On  29 Jan,  Quill  Capita  Trust  signed  a  heads  of  agreement  (HOA)  with Malaysian Resources Corp  (MRC MK, NEUTRAL,  FV: MYR1.32) for the acquisition of Platinum Sentral for  MYR750m, to be settled through cash and the issuance of new  units.  Its  management was unable to  provide more  details  as  it  is  in  the  midst  of  undergoing  due  diligence .  Barring unforeseen circumstances,  the REIT  is targeting to finalise and sign the sale  and purchase agreement  (SPA)  with Malaysian Resources by  endMarch or early April, and complete the whole exercise by early 4Q14. As the  settlement  will  involve  the  issuance  of  at  least  200m  new  units  to Malaysian  Resources,  it  will  likely  emerge  as  the  REIT’s  major unitholder, with holdings of about 28%. This will also see a dilution in the holdings of its two largest unitholders, CapitaCommercial Trust (CCT SP, NR)  and  Quill  Group,  whose  respective  holdings  may  be  reduced  to about 16.3% (from 30% currently).
• CapitaLand to exit? We believe that Singapore’s CapitaLand Group, via CapitaCommercial Trust, could be looking to dispose of its entire stake in Quil  Capita  Trust  over  the  long  run.  CapitaCommercial  Trust  has announced  that its investment in  the REIT comprises less than 1% of its total  assets.  As  such,  any  changes  to  its  unitholding  will  have  a negligible  impact  on  CapitaCommercial  Trust’s  earnings.  Furthermore, Malaysian Resources  is understood to be acquiring CapitaLand RECM Pte  Ltd  (CRPL)’s  entire  40%  stake  in  Quill  Capita  Management  SB.CRPL,  a  wholly-owned  subsidiary  of  CapitaLand,  will  no  longer participate in the day-to-day management of the REIT.
• Still  NEUTRAL.  Our  DDM-based  FV  stays  at  MYR1.25.  We  reiterate that the  emergence of Malaysian Resources Corp  as a major unitholder will likely be synergistic  in  the longer term  and could  propel  the REIT  to the next level and put it back on investors’ radar.
• Ongoing due diligence for Malaysian Resources Corp deal. We recently met Quill Capita Trust  CEO  Ms  Yong Su-Lin  and  its investor relations manager,  Ms Joyce Loh, for more information on the recently-announced  deal  with Malaysian Resources (MRC MK, NEUTRAL, FV: MYR1.32). On 29 Jan, the REIT signed a heads  of  agreement  (HOA)  with  Malaysian  Resources  for  the  acquisition  of Platinum  Sentral  office  assets  for  MYR750m,  to  be  settled  via  cash  and  the issuance of new units. The management was unable to provide more details as it is in the midst of performing due diligence on the proposed acquisition. The HOA will be valid for 30 business days (with an automatic  extension of 15 business days  if  the  parties  are  unable  to  complete  their  due  diligence  exercises.  The REIT is targeted to finalise and  sign the SPA with Malaysian Resources by  endMarch or early April, and complete the entire exercise by early 4Q14.
• Funding  details  yet  to  be  finalised.  In  its  announcement,  the  REIT’s management  stated  that  it  intends  to  fund  the  MYR486m  cash  portion  of  the Platinum  Sentral  acquisition  through  a  mix  of  debt-equity  funding.  It  also indicated that the funding details will only be finalised once it has signed the SPA for  the  acquisition.  Over  the  short  term,  management   is  not  too  worried  if  the REIT’s gearing breaches 40% as it believes that its asset value will likely remain stable  –  which  means  that  a  gearing  level  of  >40%  will  still  be  manageable. Based on our scenario analysis – assuming that the REIT’s gearing will go up to 40% and  it will  issue new units at MYR1.15/unit  –  it  could have headroom  for debt of about MYR339.2m, if  its  gearing is capped  at 40% of the enlarged asset value. This  will  leave  it with  only about MYR146.8m to be raised through equity financing.
• Malaysian  Resources  Corp  to  become  largest  unitholder.  Given  that  the settlement  will  involve  the  issuance  of  at  least  200m  new  units  to  Malaysian Resources,  the  company  will  likely  emerge  as  one  of  the  major  unitholders  in Quill  Capita  Trust,  with  holdings  of  about  28%.  This  exercise  will  also  see  a dilution in the holdings of  the REIT’s  two largest unitholders, CapitaCommercial Trust  (CCT)  and  Quill  Group,  whose  respective  holdings  may  be  reduced  to about  16.3%  (from  30%  currently).  Malaysian  Resources,  which  has  also proposed  to  acquire  a  41%  stake  in  the  REIT’s  management  company,  Quill Capita Management SB (QCM),  will acquire 40%  of the stake  from CapitaLand RECM  Pte  Ltd  (CRPL)  and  1%  from  Coast  Capital  SB.  This  will  allow  it  to participate  in  the  day-to-day  management  as  well  as  receive  a  share  of management  fees  paid  to  QCM.  We  believe  that  going  forward,  Malaysian Resources  will  likely  use  the  REIT  as  a  vehicle  to  park  its  investment  assets, given that this is the fastest way to unlock the value of those assets.
• CapitaLand  to  exit?  We  believe  that  Singapore-based  CapitaLand  Group, through Capita Commercial Trust,  could be looking to dispose of its  entire stake in  Quill  Capita  Trust  over  the  long  run.  In  the  29  Jan  announcement,  Capita Commercial Trust  stated that its investment in the REIT comprises less than 1% of  its  total  assets.  Thus,  any  changes  to  Quill  Capita  Trust’s  unitholdings  will have a negligible impact on Capita Commercial Trust’s earnings. Furthermore, given  Malaysian  Resources  Corp’s  majority  stake  in  QCM  upon  completion  of the deal, CRPL will no longer be  participating in the day-to-day management of the REIT. CRPL is a wholly-owned subsidiary of CapitaLand.  
• Organic growth to remain flattish. Quill Capita Trust expects flattish growth for its  FY14  DPU.  Organic  growth  remains  unexciting,  as  its  Quill  Building  10 remains empty ever since HSBC vacated it back in April 2010, hampering overall growth.  As the ongoing major refurbishment at Menara Technip is expected to be completed by end-2014, there could be some upside to its rental contribution from  FY15  onwards.  Meanwhile,  about  23%  of  its  net  lettable  area  is  due  to expire  this  year,  and  the  REIT  expects  that  there  will  be  minimal  non-renewal risks  –  although  it  expects  rental  rates  to  grow  only  at  about  2-3%  annually.Inorganic  growth  opportunities  through  Quill  Group  are  rather  limited,  as  the REIT’s  agreement  with  Quill Group  on  the  right of  first  refusal  (ROFR)  for  the latter’s  assets  has  already  lapsed  and  there  is  no  indication  that  this  ROFR agreement  will  be  renewed.  As  such,  we  reiterate  our  view  that  the  deal  with Malaysian Resources Corp  is positive for  the REIT, as it could provide  steady inorganic growth opportunities through the former’s pipeline assets.
• Maintain  NEUTRAL.  Our  DDM-based  FV  is  unchanged  at  MYR1.25.  We reiterate  that the  emergence of Malaysian Resources  as a major unitholder will likely be synergistic  over the longer term  and could help to propel  Quill Capita Trust to the next level and put it back on investors’ radar.

Financial Exhibits

SWOT Analysis

Company Profile

Quill  Capita  is  a  mid-cap  MREIT  focusing  on  office/commercial  assets,  which  are  largely  concentrated  in  the  Klang  Valley  and Cyberjaya areas.

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Source: RHB