MRCB-Quill REIT
(Jan 20, 99.5 sen)
Maintain hold with a lower target price (TP) of RM1.02: MRCB-Quill REIT’s (MQREIT) core net profit (CNP) for the financial year ended Dec 31, 2019 (FY19) was below expectations — 91% of our full-year forecast and 89% of consensus. Its FY19 revenue also fell short, at 97% of our full-year estimate, and down 7.2% year-on-year (y-o-y) due to lower revenue from Platinum Sentral, Wisma Technip and Quill Building (QB) 5, as well as a loss of revenue from the disposal of QB8.

Its FY19 CNP, excluding a negative revaluation of assets of RM36.7 million, slid 14% y-o-y to RM66 million due to interest income down 26% y-o-y. The total FY19 distribution per unit (DPU) was 6.8 sen, 16% lower than FY18’s DPU of 8.1 sen but in line with expectations.

The group recognised a deficit on the revaluation of assets in 4QFY19 amounting to RM36.7 million, leading to the quarter’s reported net loss of RM24.4 million. Stripping the asset revaluation’s impact, its 4QFY19 CNP of RM12.4 million translated into an 8.4% y-o-y decline, the result of a weaker rental revenue and a 34% y-o-y drop in interest income.

For the full year, MQREIT achieved an overall portfolio occupancy of 90%, a nudge lower than FY18’s 93%. The overall average occupancy’s main drag was Platinum Sentral. It achieved an 84% occupancy at end-FY19, ending the year with 50,000 sq ft of untenanted space left vacant by the Land Public Transport Agency and MyHSR. Separately, Menara Shell achieved a 95% occupancy at end-FY19, with finalising tenancy for the remaining 5%.

For 2020, the group believes the Klang Valley’s office market will remain challenging. Therefore, it will still focus on asset management and/or enhancement and more effective leasing strategies, particularly for Platinum Sentral, targeting tenant retention.

We cut our FY20 and FY21 earnings per share forecasts or DPU by 1.8% to 1.9% due to housekeeping and introduced FY22 forecast numbers. We forecast a 90% average occupancy for FY20, reflecting a gradual improvement in tenancy at Platinum Sentral and reduced occupancy at Wisma Technip FMC. Our “hold” call is kept, supported by still-attractive revised FY20 to FY22 forecast dividend yields of 6.8% to 7.3% — the highest in our real estate investment trust (REIT) sector coverage. Upside risks are a better rental reversion and improved occupancy rates. Downside risks are non-renewals of expiring leases and lower occupancy rates. — CGS-CIMB Research, Jan 20