RHB Research: Maintains ‘outperform’ rating on Quill Capita Trust

* Within expectations. Excluding RM0.4 million gain from re-measurement of fair value of interest rate swaps, Quill Capita reported 1QFY2012/10 normalised net profit of RM7.5 million (+1.6% y-o-y, +1.2% q-o-q). This accounted for 21%-22% of our and consensus estimates. We consider this to be in line with our expectation as we expect earnings to pick up in 2H in the absence of lumpy utilities costs the company normally recognises in the early part of the year. Y-o-y earnings growth of 1.6% was mainly driven by higher rental rates for its existing buildings as well as lower borrowings cost after the refinancing of short-term debt to a five-year term loan facilities (currently 96% of the company debts are on fixed rate). Meanwhile, gearing ratio increased slightly from 0.37x as at end-4Q2009 to 0.38x as at end-1Q2010. No dividend was declared during the quarter.

* Low occupancy risk in 2010. The company has managed to renew all lease agreements due in FY2009. Despite the tough economic conditions, some were even renewed at higher rates. The company’s occupancy risk will be low in 2010 as only 1% of total NLA will be up for renewal in 4Q2010. Meanwhile, the company can only afford to acquire up to RM40 million worth of properties via borrowing (based on the company’s internal target gearing ratio of 0.4x) before undertaking a placement of units. Given the huge discount of 32% between its current price of RM1.04 and previous placement price of RM1.52, we believe a new placement is unlikely anyway. Among the targets, we believe the most likely one is HSBC–HQ (estimated value of RM38 million).

* Risks. The risks include: 1) non-renewal of tenancy after expiry; and 2) unfavourable economic conditions.

* Forecasts. No change to our FY2010-12 earnings forecasts.

* Investment case. We are benchmarking our valuation for Quill Capita at dividend yield of 7%, in line with the pre-crisis average yield of 6.5-7%. We value the company at RM1.17 that is also backed by a DDM-based value of RM1.38 based on 8.8% WACC. Maintain “outperform”.