Maybank IB: Still a 'buy' for Quill Capita Trust

Defensive high-yield play. 1Q2010 realised net profit of RM8 million (+2% y-o-y, -16% q-o-q) was within our and market expectations. Earnings are relatively defensive in 2010 as the next major tenancy up for renewal will be in 2011 (28% of total NLA). We continue to like Quill Capita Trust (QCT) for its strong parental links and >7.5% gross dividend yield p.a.. Maintain “buy” with our DCF-based TP of RM1.18.

No surprises to results. Realised profit rose 2% y-o-y on step-up rental but fell 16% q-o-q due to higher operating expenses (+26% q-o-q) and write-back of unutilised expenses in 4Q2009. Additionally, borrowing costs fell 4% y-o-y (flat q-o-q) following the refinancing of the RM72 million short-term debt to five-year term loan facilities, and at a lower blended interest cost of 4.7%. We note that any interest rate hike in the near term will have minimal impact on QCT as 96% of its borrowings are at fixed interest rates. A provision for income distribution of RM7 million was made for 1Q2010 (100% payout), representing 1.9sen/unit or 1.8% yield.

Assets in the pipeline. For the near term, QCT is eyeing two new properties belonging to its sponsors, Quill Group and CapitaLand, to enhance earnings, namely: (i) the new HSBC HQ Annexe building, Jalan Ampang (in 2010); and (ii) QB 7, KL Sentral (in 2011), potentially worth a combined RM400 million in value. Over the longer term, other potential injections include QB 9-Quill HQ, Petaling Jaya and One Mont’Kiara.

Still a “buy”. The stock remains attractive for its >7.5% gross dividend yield in 2010-12. Its current price has yet to factor in future acquisition growth potential. Its strong parental links with CapitaLand of Singapore and Quill Group will continue to provide a pipeline of quality assets for future injections into the REIT.