MRCB-Quill REIT (Aug 8, RM1.07)

Downgrade to hold with a lower target price (TP) of RM1.09 (previously RM1.15): MRCB-Quill REIT’s (MQREIT) second quarter of financial year 2019 (2QFY19) core net profit (CNP) of RM16.5 million (-15.2% quarter-on-quarter [q-o-q]; -22.7% year-on-year [y-o-y]) translated into first half (1H) of FY19 core earnings of RM35.9 million (-15.2% y-o-y). The results were below both our and consensus expectations at 44% and 43% of full-year forecasts respectively. The deviation was due to lower-than-expected revenue.

The group declared a semi-annual dividend of 3.43 sen per unit (1HFY18: 4.23 sen) going ex on Aug 22, 2019.

Q-o-q, total gross revenue decreased by 6.3% to RM38.8 million, which then led to a fall in CNP to RM16.5 million. The cutback was caused by poorer revenue contributions from Platinum Sentral (the Land Public Transport Agency [SPAD] downsized and MyHSR Corp Sdn Bhd moved out in May), Wisma Technip (tenancy downsized) and QB5 (IBM moved out in April). However, this was slightly cushioned by a decline in administrative expenses.

Y-o-y, CNP fell by 22.7% to RM16.5 million. The drop was also driven by lower revenue contributions, mainly from Platinum Sentral, Wisma Technip and QB5. However, the fall was mitigated marginally by a reduction in property operating expense (-3.4%) owing to cost efficiency, lower finance costs as well as lower manager’s fees.

Year-to-date, revenue had decreased by 8.3% to RM80.2 million as of 1HFY19. Likewise, the CNP of RM35.9 million was a decrement of 15.2%. The lower revenue was due to: i) a loss of revenue from QB8 (disposed of in April 2018); and ii) a lower occupancy rate. Nevertheless, it was cushioned by: i) lower property expenses (-3.8%); and ii) lower finance costs (-0.2%).

The occupancy rate stayed at 89% (1QFY19: 89%). The average debt-to-maturity decreased to 2.07 years from 2.32 years (1QFY19), while the average cost of financing was kept at 4.5%. As for the gearing level, it tapered to 37.1% (1QFY19: 37.5%), with a majority of its total borrowings being charged a fixed interest rate (76%).

The lacklustre overall office market has dragged MQREIT’s showing. Going forward, the management will focus on cost discipline and tenant retention. We believe MQREIT will continue to sustain despite the moving out of tenants from a few assets. While there are tenants moving out, new tenancies for approximately 89,000 sq ft of net lettable area have been executed, which includes a co-working space. We expect income contributions from these new leases by 3QFY19 to 4QFY19. However, we do acknowledge that finding a tenant replacement for QB5 will take some time as demand for office spaces in Cyberjaya is not as vibrant compared with areas in the Kuala Lumpur fringes.

We reduced our FY19/FY20/FY21 earnings forecasts by 7.3%/5.9%/5.8% respectively after factoring in lower rental income.

We cut our rating to “hold” with a lower TP of RM1.09 (from RM1.15) based on a targeted yield of 6.7%. Our valuation is based on the two-year historical average yield spread between dividend yields and 10-year Malaysian Government Securities. — Hong Leong Investment Bank Research, Aug 8

This article first appeared in The Edge Financial Daily, on Aug 9, 2019.

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