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