Quill  Capita  Trust’s  2QFY14  results  were  in  line  with  expectations.  A DPU of 4.10  sen was announced for 1HFY14,  in line with our forecasts. The  REIT’s  organic  growth  remains  soft  for  the  REIT.  Meanwhile,  the acquisition of Platinum Sentral  is still likely to come through,  and thatfuture delays, if any,  will not have a significant impact on  QCT’s  FY14 DPU. Maintain NEUTRAL and a FV of MYR1.25.

In line.  Quill Capita Trust’s  2QFY14 net profit of MYR8.6m (-3.9% y-o-y,+4.9%  q-o-q)  was  in  line  with  estimates.  Earnings growth continued  to remain flattish due to the soft office rental market, while higher repair and maintenance  costs  incurred  in  1HFY14  squeezed  net  property  income margins slightly to 76.5% (1HFY13: 77.2%).  Management  announced  a total  distribution  per  unit  (DPU)  of  4.10  sen  for  1HFY14.  Despite  the weak  market,  the  REIT  was  able  to  renew  24%  out  of  the  31%  of  net lettable area (NLA) due to expire this year, while portfolio occupancy was still  stable  at  91%.  At  present,  95%  of  its  debts  are  on  fixed  rates, thereby limiting its exposure to higher interest rates. Nonetheless, as it is expected  to  take  on  more  debt  to  acquire  Platinum  Sentral  (PS),  its future average cost of debt could be higher than the current 4.3%.

Update on the acquisition of PS.  On 11 July, the REIT and Malaysian Resources  Corp  (MRCB)  (MRC  MK,  BUY,  FV:  MYR1.87)  announced that the Securities Commission turned down the proposal that MRCB, its associates  and  the  Quill  Group  are  not  regarded  as  persons  acting  in concert in relation to the REIT, on PS’ acquisition. As such, a mandatory takeover offer could be triggered. However, our checks reveal the partieswill  seek  an  exemption  from  the  obligation  to  carry  out  the  mandatory offer through the “Whitewash Procedure”  under regulations on takeovers and mergers.  We believe  that  the  exemption  will be approved  and  the acquisition will still go through, although  the  completion of the exercise could  be  slightly  delayed  from  its  initial  end-3QFY14  target.  This, however,  is  not  expected  to  have  a  significant  impact  on  the  REIT’sFY14  DPU.  Management  is  also  aware  of  investors’  concerns  on  its future change of guard, and will address the issue in due course.

NEUTRAL.  We  maintain  our  forecasts.  Some  persistent  short-term underlying  risks  for  the  REIT  include:  i)  the  office  space  oversupply situation,  ii)  high  post-acquisition  gearing,  and  iii)  uncertainties  over  achange in management. As such, we maintain NEUTRAL and our DDMbased FV of MYR1.25 for now.

\

Source: RHB