MQREIT’s disposal of QB8 to have neutral impact — Kenanga Research
KUALA LUMPUR: MRCB-Quill Real Estate Investment Trust’s (MQREIT) disposal of its industrial asset, Quill Building 8 – DJL XPJ (QB8) will have a neutral impact on the group says Kenanga Investment Bank Bhd (Kenanga Research).
To recap, the REIT announced via a bursa filing on Monday (January 8) that it would be disposing of QB8 to Transmark Corporation Sdn Bhd for a cash consideration of RM28 million – a slight premium from its book value of RM25 million.
The disposal of the threestorey office building located in Shah Alam is expected to be completed in the second quarter of 2018 (2Q18) and yield a net gain on disposal of RM1.28 million.
The rationale for the disposal is said to be in line with the objective of MQREIT and its manager’s strategy to regularly evaluate and rejuvenate MQREIT’s property portfolio.
The development came as shock to Kenanga Research as they stated in a quick bites report on Tuesday (January 9) that they did not expect any disposals in the near terms due to MQREIT’s stable portfolio.
However, they did believe the rationale behind the move is to unlock value to fund ongoing asset enhancement initiatives and lighten its balance sheet to possibly make way for future acquisitions.
“All in, we are neutral on the impact from the disposal as the affect to earnings in financial year 2018 (FY18) is negligible.
“The net gains on disposal of RM1.28 million (will) offset the loss in income from QB8 in FY18, as QB8 only makes up less than 2 per cent of RNI on an annualised basis,” said the research arm.
However that being said, Kenanga Research highlights the gains from asset disposals are regarded as non-core earnings and has decided to lower their FY18 core net profit (CNP) estimates for MQREIT by 1 per cent to RM94.2 million to account for the loss of income from QB8. FY17E CNP is maintained.
“Our FY18 core EPU is lowered to 8.7 sen from 8.8 sen. However, our DPU is unchanged as we expect the net gains on disposal of 0.12 sen per unit to offset the loss of income.
“Maintain FY17 to18E GDPU of 8.4 to 8.4 sen, implying gross yields of 6.9 to 6.9 per cent. Post the disposal, we expect FY18 gearing to decrease marginally to 0.38 fold from 0.39 fold,” added the research arm.
With a minimal 14 to 26 per cent of net lettable assets (NLA) up for expiry in FY17 to FY18, Kenanga Research opines that MQREIT will expect low singdigit reversions during the period.
The research arm maintains ‘Outperform’ on the stock with a target price (TP) of RM1.28.
“Despite our conservative valuations, we are comfortable with our call on MQREIT as it is commanding attractive gross yield of 6.9 per cent versus its peers under our coverage with an average of 5.7 per cent,” justified the research arm.