Quill Capita Trust
(Nov 24, RM1.18)
Downgrade from “buy” to “hold” with a target price (TP) of RM1.25: The injection of Platinum Sentral office building in Kuala Lumpur is expected to be completed by late 2014 or early 2015. At RM740 million, the property will account for 89% of Quill Capita’s current asset base of RM828 million. It will also see the entry of Malaysian Resources Corp Bhd (MRCB) as a major shareholder with an approximately 31% stake.

The injection involves the issue of a substantial number of new units to MRCB, new placements and borrowings. Although the earnings base will expand, we estimate earnings per unit will be diluted by about 3%. Dividend per unit (DPU) should remain firm thanks to accommodative payout ratios and cash flow; but near-term organic DPU growth may be capped.

The outlook for office space rental in Kuala Lumpur, the Klang Valley and Cyberjaya (where the real estate investment trust [REIT] has exposure) remains challenging due to excess supply. The REIT is unlikely to see strong reversions, and occupancy levels could drop. About 20% of tenancies in the REIT’s current portfolio are expiring in 2015.

The REIT still has earnings growth opportunities in the vacant QB10 (RM68,000 sq ft net lettable area, Petaling Jaya) and the half-vacant retail portion of Platinum Sentral, but the overall growth outlook is relatively muted. Post-injection gearing of almost 45% will be a dampener on further acquisitions/injections in the near term, although the REIT will obtain rights of first refusal to MRCB’s investment properties.

We trimmed TP to RM1.25 based on the dividend discount model valuation and assuming an 8% cost of equity and a 1% terminal growth. The stock will be supported by a 7.2% forward yield. — AllianceDBS Research, Nov 24

This article first appeared in The Edge Financial Daily, on November 25, 2014.