Resilient showing in MRCB-Quill’s 1Q

MRCB-Quill REIT (May 3, RM1.14)

Maintain buy with an unchanged target price (TP) of RM1.24: MRCB-Quill REIT’s first quarter of financial year 2016 (1QFY16) gross revenue of RM32.7 million, up by 75.5% year-on-year (y-o-y), was translated into a normalised net profit of RM15.24 million (84.1% higher y-o-y), accounting for 26.2% and 26.8% of Hong Leong Investment Bank Research and consensus full-year forecasts respectively. There were no dividends in the quarter as its dividends are usually declared semi-annually.

MRCB-Quill’s resilient revenue growth (for y-o-y and quarter-on-quarter [q-o-q]) in 1QFY16 was due to additional income from Platinum Sentral and a step up in rent adjustments. Net income grew higher by 84.1% y-o-y helped by lower repairs and maintenance this year, while -6.9% q-o-q given the low base of operational expenditure last quarter from cost-saving provision.

Its overall occupancy rate was stable at 97.1%, (0.4% of net lettable area [NLA] not renewed was from Plaza Mont Kiara). Major asset enhancement initiatives planned for this year include energy-saving and carbon footprint reduction at both Quill Building 1-DHL and Quill Building 4-DHL as part of the negotiations during renewals.

As reported in our previous note, we understand that the RM640 million acquisition of Menara Shell will likely complete in 1QFY17. Currently, the vendor is in the midst of preparing the submission of an application for a certificate of the proposed strata plan to subdivide Menara Shell and other buildings attached under a master title.

In terms of funding, rights issues or placements and minimal debt would be in the mix in order to pare down the gearing level. Despite the challenging outlook for 2016, only 7% of the NLA is due for renewal, hence, the downside is minimal from a risk perspective. In terms of inorganic growth, other than the imminent sizeable acquisition of Menara Shell, we understand that the management is not looking at any other acquisition or asset injection in FY16.

MRCB-Quill’s risks are its high gearing compared with industry average and a slower rental reversion rate for office market. We make no changes to our forecasts and keep a “buy” rating on MRCB-Quill with an unchanged TP of RM1.24. It has a consistently high distribution per unit yield of above 7% and imminent asset injections in the near future.

Positives for the REIT include a high possibility of asset injections from sponsor, and resilient earnings’ growth with undemanding valuations. Its negatives are its high gearing, illiquid trading and softer office market.

Our valuation was pegged to a targeted yield based on two standard deviations below 7.2%, one-year historical average yield spread of MRCB-Quill REIT and 10-year government bond in view of imminent yield-accretive injection(s). — Hong Leong Investment Bank Research, May 3

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This article first appeared in The Edge Financial Daily, on May 4, 2016. Subscribe to The Edge Financial Daily here.