1Q19 realised net income (RNI) of RM19.4m came in well within our and consensus expectations at 23% and 24%, respectively. No dividends, as expected. FY19-20 will see minimal lease expiries of 19-18% of NLA on flattish reversions. Maintain FY19-20E CNP of RM84.1-84.3m. Maintain MP and TP of RM1.10.

1Q19 realised net income (RNI) of RM19.4m came in well within our and consensus expectations at 23% and 24%, respectively. No dividends, as expected.

Results’ highlights. YoY, top-line was down by 6% mainly from lower rental contributions from Platinum Sentral, Wisma Technip, and QB5 likely due to tenant incentives, as well as loss of revenue from the disposal of QB8 - DHL XPJ, which was completed in 2Q18. NPI margin was flattish at 77%, but RNI declined by 8% on the back of higher financing cost (+2%). QoQ, top-line declined by 3% likely due to similar reasons mentioned above. However, lower property operating expenditure (-7%) due to better cost management and lower financing cost (-10%) softened the impact on bottom-line, which only declined by 1%.

Outlook. FY19-20E will see minimal leases up for expiry, 19-18% of net lettable assets (NLA) which are comforting given the tough office market conditions due to the oversupply of office spaces in KL and the Klang Valley, and risk of tenant attrition. Going forward, we are expecting flattish to low single-digit reversions for MQREIT’s assets, and expect minimal capex of RM12-10m, mostly for maintenance.

Maintain FY19-20E CNP of RM84.1-84.3m Our FY19-20E GDPU of 7.7-7.7 sen (NDPU of 7.0-7.0 sen), suggest gross yield of 7.0-7.0% (net yield of 6.3-6.3%), respectively.

Maintain MARKET PERFORM on an unchanged Target Price of RM1.10 on FY19E GDPS of 7.7 sen and a +3.1ppt spread to the 10- year MGS target of 3.90%. Our applied spread on MQREIT is the highest compared to other sizeable MREITs under our coverage (+1.3ppt to +3.1ppt) due to tough market conditions on concerns of oversupply in the office space. MQREIT is commanding decent gross yield of 7.0%, which is above its peers’ average gross yield of 5.7%, but we believe this is justifiable given the abovementioned concerns for office assets. However, we are comfortable with our call as we believe we have priced in most downside risks into MQREIT’s valuations and earnings.

Risks to our call include bond yield expansions or compressions and weaker/stronger-than-expected rental reversions.

Source: Kenanga Research - 10 May 2019