MQREIT announced that it has entered into a HOA with MRCB for the acquisition of Shell Tower for MYR640m. Upgrade to BUY with an unchanged TP of MYR1.23 (13% upside) due to its more compelling growth prospects. Although acquisition details have yet to be finalised, we believe that the injection of the asset should be earnings-accretive for the REIT, given the asset’s long-term lease and strategic location.

Signing a HOA for Shell Tower with MRCB. MRCB-Quill REIT (MQREIT) has entered into a heads of agreement with its sponsor, Malaysian Resources Corp (MRCB) (MRC MK, BUY, TP: MYR1.60) for the potential acquisition of Shell Tower for MYR640m. Barring any unforeseen circumstances, a formal sale and purchase agreement (SPA) is expected to be signed within the next 60 business days. The acquisition will be funded through a combination of equity and debt, due to MQREIT’s relatively high gearing of 0.43x. If the deal goes through, its total investment asset value will breach the MYR2bn mark (from MYR1.56bn as at end-3Q15).

Good prospects for the asset. We are positive on the prospects for the asset due to its strategic location and full occupancy. Based on our checks with management, Shell, which takes up 60 of the total NLA of 556,468 sqf, has signed a long-term lease largely to minimise future vacancy risks. Refurbishment expenses will also be minimised as the building is only two years old. Although the impact on bottomline should be positive, we believe that the DPU growth will likely be slower than the net profit growth due to the placement of new units.

Earnings forecasts. We maintain our FY15-17 earnings forecasts. Note that should the deal go through, at an assumed gross yield of 6.5% (similar to that of Platinum Sentral), we believe that MQREIT’s topline could see an increase of about 10-33% for FY16-17.

Upgrade to BUY (from Neutral). We maintain our DDM-based TP of MYR1.23. Our call upgrade (13% upside) is on the basis of MQREIT’s stable growth prospects as: i) most of its tenants are on long-term leases (>5 years), ii) high relocation costs for some tenants ensure tenants’ “stickiness”, and iii) MRCB and Quill Group could provide inorganic growth opportunities. Key risks include: i) slower-than-expected rental reversions, and ii) competition from an influx of new office space. MQREIT’s implied FY16F P/E of 14.5x is at a significant discount to our sector’s FY16F implied average P/E of 16.6x.

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

MRCB-Quill REIT (MQREIT) is a mid-cap MREIT that focuses on office/commercial assets. Assets are largely concentrated in the Klang Valley and Cyberjaya areas.

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Source: RHB Research - 4 Dec 2015