Hwang DBS retains Quill Capital on Buy, RHB Research says Sell

From Star Online: Business

2nd August 2013

 

KUALA LUMPUR: HwangDBS Research is maintaining its Buy calls on real estate investment trust Quill Capital Trust but is revising its target price to RM1.40 from RM1.45, while RHB Research says it’s time to Sell.

According to HwangDBS Research, QCT’s first-half earnings were well within estimates, noting that the 4.1 sen dividend declared amounted to a 94% payout but said it was cutting earnings estimates for the financial years 2013-2015 by 5-8% because of softer rental reversions and the zero contribution to earnings from their Quill Building 10 in PJ’s Section 13.

The second quarter net profit at RM9mil was 3% lower year-on-year (plus 10% q-o-q) on slightly lower revenue and weaker net property income margin.

“We attribute the lower revenue to vacancy at Quill Building 10 – a result of high office space supply and attraction of newer office buildings (QB10 is now seven years old),” it said.

 

Noting that office rental is now a tenants’ market, HwangDBS said the situation would continue to be challenging from the large amount of incoming office supply during the year. Average occupancy in the Klang Valley fell by 3.7 percentage points q-o-q in the first quarter of the year.

Trimming the target price for QCT, HwangDBS Research is nonetheless maintaining its Buy call.

“While earnings outlook for Quill is underwhelming, the REIT still offers a strong 7.1% distribution yield. Its balance sheet is also healthy at 36% gearing and 4.3% average cost of debt (100% fixed rate with nearest refinancing expected in 2016),” it said.

Agreeing that there is now an oversupply of office space,RHB Research is reiterating its Sell call on the stock with target price unchanged at RM1.10.

It said QCT continues to be plagued by rising vacancies, pointing out that year-to-date, it has only managed to renew about 6% out of the 29% of total net lettable areas (NLA) due to expire this year.

“Given the softening growth in office rental rates, we expect its overall rental growth to remain flat, especially given its large exposure to the office space segment (63% of total asset value).

“We maintain our SELL call on QCT, with an unchanged fair valuation of RM1.10. The medium-term outlook for the REIT remains murky due to the current oversupply of office space. In addition, the rise in bond yields has taken some shine off the REIT sector,” it said.

The stock is trading Friday morning at around RM1.23.

 

[Source]