HLIB maintains ‘Buy’ call on MQREIT, TP down to RM1.17

By FARA AISYAH

Hong Leong Investment Bank Bhd (HLIB) has maintained its ‘Buy’ call for MRCB-Quill Real Estate Investment Trust (MQREIT), but reduced the target price (TP) to RM1.17 from RM1.23.

In its research report last week, the investment bank said the decline in TP was due to lower targeted yield of 6.7% from 6.9% previously.

“Following the dovish tilt by major central banks (the US Federal Reserve and European Central Bank), as well as Bank Negara Malaysia, we revise our assumption of the 10-year Malaysian Government Securities (MGS) yield to 3.9% (from 4.1%; currently at 3.8%).

“We also roll forward valuation to mid-financial year 2020 (FY20). Our valuation model is based on the targeted yield of two-year historical average yield spread between dividend yield and 10-year MGS yield,” it noted.

Following the release of MQREIT’s annual report, HLIB has also adjusted its FY19-FY20 forecast by 5% lower due to model housekeeping.

HLIB said it continues to like MQREIT given its attractive dividend yield of 7%, the highest among the REITs in its coverage, and stable assets in the prime location of Kuala Lumpur Sentral with high occupancy rate.

“The occupancy rate fell but remained healthy at 93% in FY18, from 96.3% in FY17, considering the average occupancy rate in the Klang Valley has been falling and stood at 80% in 2018.

“The gearing ratio stood at 37.7%, comfortably below the 50% limit, with a majority of its total borrowings (76%) being charged a fixed interest rate,” it noted.

HLIB also said MQREIT is currently the first and only REIT under its coverage that has embraced co-working space, with the 45,000 sq ft (4.18 sq m) in Platinum Sentral leased to a multinational co-working space operator.

“The mushrooming of co-working space presents a symbiotic relationship to REITs,” it said.

HLIB also believes that REITs will benefit by attaining better take-up rate certainty through the signing on one large tenant, as opposed to multiple fragmented smaller tenants, and that co-working operators can capture a larger tenant base compared to REITs.

MQREIT has also allocated RM10 million for capital expenditure in 2019, mainly for asset enhancement initiatives.

“With the expectations of a challenging office market, MQREIT intends to enhance the aesthetics of the buildings to maintain its quality in order to preserve occupancy,” HLIB said.

The company has planned improvement works on several properties including Wisma Technip (washrooms and external façade), Quill Building 5-IBM (air conditioning system), Platinum Sentral (several common areas’ facilities upgrades) and Menara Shell (lift systems).

Looking ahead, HLIB said MQ-REIT’s management will be prioritising cost management, as well as tenant retention, over reversion growth.