MRCB-Quill REIT (May 10, RM1.09)
Maintain buy with a slightly lower target price of RM1.16: MRCB-Quill REIT’s (MQREIT) first quarter ended March 31, 2019 (1QFY19) gross revenue of RM41.4 million (-3% quarter-on-quarter [q-o-q]; -6% year-on-year [y-o-y]) translated into a core net profit (CNP) of RM19.4 million (-1% q-o-q; -7.6% y-o-y). The results were below both our and consensus’ expectations, accounting for 23.2% and 23.3% respectively. The deviation was due to lower-than-expected interest income.
The decline in CNP was driven by lower revenue contributions, mainly from Platinum Sentral, Wisma Technip and Quill Building 5 — IBM (QB5), as well as the loss of revenue after the disposal of QB8 back in April 2018. Nevertheless, the fall was marginally mitigated by a reduction in property operating expense (-6.5%) attributed to lower expenses incurred by some properties, and other expenses (-8.8%).
The occupancy rate fell to 89% (FY18: 93%), relatively stable considering that the average occupancy rate in Kuala Lumpur stood at 78.7% in FY18 (according to Knight Frank). Average debt to maturity decreased slightly from 2.47 years to 2.32 years, while the average cost of debt was maintained at 4.5%. The gearing level decreased slightly to 37.5% (FY18: 37.7%), comfortably below the 50% limit, with a majority of its total borrowings (76%) being charged a fixed interest rate.
Despite the lacklustre overall office market, MQREIT’s office space will remain relatively stable and well guarded by its long weighted average term to expiry with well-spread net lettable area expiry. Going forward, management will be focusing on cost management as well as tenant retention over reversion growth. Also, with the expectations of a challenging office market, some properties will be scheduled for enhancement works, namely Wisma Technip (washrooms and the external façade), QB5 (the air-conditioning system), Platinum Sentral (several common-area facility upgrades) and Menara Shell (lift systems). — Hong Leong Investment Bank Research, May 10
This article first appeared in The Edge Financial Daily, on May 13, 2019.
TOP PICKS BY EDGEPROP
Serendah Golf Resort (Chazara, Fabriciana, Issoria, Vanessa)