Company Note - CIMB Note IMPORTANT ... While the acquisition of Menara Shell is likely DPU-neutral...

REIT│Malaysia│Equity research│October 18, 2016

Company Note

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH.

Powered by the

EFA Platform

MRCB-Quill REIT Expanding footprint in the ‘Sentral’ heart of KL

■ MQREIT is one of the most sizeable listed office REITs in Malaysia, with total assets under management (AUM) of RM2.3bn by end-2016F.

■ While the acquisition of Menara Shell is likely DPU-neutral in the near term, we are positive on the asset’s long-term prospects, which will improve its overall portfolio.

■ Further upside for DPU could come from AEIs at Platinum Sentral as well as higher rental reversion rates for its KL Sentral, Cyberjaya and KL city assets.

■ We initiate coverage on MQREIT with an Add rating and 12-month DDM-based target price of RM1.40. This implies total absolute return of c.17%.

One of the most sizeable and finest office REITs in town MQREIT is one of Malaysia’s largest office REITs, with a total portfolio size of RM2.27bn (including Menara Shell) and 11 properties under its belt by end-2016F. The group’s portfolio is occupied by high-quality tenants, consisting of a mix of global MNCs, local companies and GLCs. Backed by two reputable sponsors - MRCB and Quill Group - MQREIT is set to benefit from the visible pipeline of assets for future acquisition; this, we believe, will set the tone for its long-term earnings growth.

Two is better than one MQREIT has one of the strongest domestic acquisition pipelines in the industry, backed by its exclusive Right of First Refusal (ROFR) for MRCB and Quill Group assets. All in, we estimate that MRCB has total assets worth RM2.1bn that it could dispose of to MQREIT, while the Quill Group has RM1bn. These provide MQREIT with acquisition visibility through 2019 and reinforce the group’s position as one of the country’s most prominent office REITs given the strategic and prime locations of its assets, in our view.

What next for the REIT player? Following the completion of the Menara Shell acquisition by end-2016F, we think the next likely acquisition will be Menara Celcom, which is located in PJ Sentral Garden City. The tower is slated for completion by end-4Q17 and MRCB estimates that it will be worth a total GDV of RM535m. Based on our understanding, MRCB has already inked a build-to-lease agreement of 15 years with Celcom for the property once it is completed. We believe this asset will be injected into MQREIT by end-2018F at the earliest.

Potential organic growth drivers We believe further DPU upside could come from asset enhancement initiatives (AEIs). We think the REIT will most likely embark on initiatives to improve the tenancy mix of Platinum Sentral, subsequent to the completion of the property's link bridges. The group could look into converting otherwise-vacant spaces into rental-yielding ones and add cafes and F&B kiosks to improve the asset's traffic flow. As such, we believe rental rates will rise due to the improved tenant mix and better floor space reconfiguration.

Initiate coverage with Add and DDM-based TP of RM1.40 We initiate coverage on MQREIT with an Add rating and DDM-based target price of RM1.40, implying a total return of c.17%. We like the long-term earnings prospects of the REIT as it leverages its two major sponsors to support growth in future asset value. The group could also benefit from upward revision in rental rates as a result of AEIs. MQREIT trades at attractive implied FY16-17F dividend yields of 6.8-6.9% (vs. peer average of 5.5-5.8%).

Key risks Key downside risks to our call include: i) a significant hike in interest rates, ii) a worse-than-expected office oversupply situation, iii) any significant negative change in REIT guidelines, and iv) a sharper-than-expected global economic downturn.

▎Malaysia

ADD Consensus ratings*: Buy 5 Hold 2 Sell 0

Current price: RM1.27

Target price: RM1.40

Previous target: RM

Up/downside: 10.2%

CIMB / Consensus: 4.3%

Reuters: MQRE.KL

Bloomberg: MQREIT MK

Market cap: US$199.1m

RM840.0m

Average daily turnover: US$0.10m

RM0.41m

Current shares o/s: 661.4m

Free float: 27.7% *Source: Bloomberg

Key changes in this note

N/A.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) 2.4 5 11.4

Relative (%) 2.4 5.9 15.1

Major shareholders % held MRCB 31.2

Capitaland Limited 17.7

Quill Land 7.4

Analyst(s)

Kristine WONG

T (60) 3 2261 9085 E [email protected]

SOURCE: COMPANY DATA, CIMB FORECASTS

Financial Summary Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F

Gross Property Revenue (RMm) 70.2 115.2 133.3 198.6 213.2

Net Property Income (RMm) 53.3 90.3 99.3 145.3 151.9

Net Profit (RMm) 40.27 60.68 60.04 92.38 98.70

Distributable Profit (RMm) 32.69 50.92 57.05 92.39 93.78

DPS (RM) 0.084 0.085 0.086 0.087 0.088

Dividend Yield 6.60% 6.67% 6.79% 6.81% 6.91%

Asset Leverage 35.1% 42.4% 42.5% 38.9% 38.7%

BVPS (RM) 1.39 1.37 1.37 1.28 1.28

P/BV (x) 0.92 0.93 0.93 0.99 0.99

Recurring ROE 6.36% 7.39% 6.63% 8.13% 7.21%

% Change In DPS Estimates

CIMB/consensus DPS (x) 1.01 1.08 1.07

92.0

100.8

109.5

118.3

127.0

1.000

1.100

1.200

1.300

1.400

Price Close Relative to FBMKLCI (RHS)

1

2

3

4

Oct-15 Jan-16 Apr-16 Jul-16

Vol m

REIT│Malaysia│MRCB-Quill REIT│October 18, 2016

2

Expanding footprint in the ‘Sentral’ heart of Kuala Lumpur

COMPANY BACKGROUND

One of Malaysia’s sizeable and finest office REITs

MQREIT was first listed in Jan 2007 with four properties worth a combined total of RM280m. Its portfolio has since grown to 11 properties (including Menara Shell) that are strategically located in the Klang Valley and Cyberjaya and the company targets its assets under management (AUM) to increase to RM2.27bn by end-2016F. The group was formerly known as Quill Capita Trust until Apr 2015, when its shareholding structure changed and Malaysia Resources Corporation Berhad (MRCB) emerged as the group’s biggest unitholder and co-sponsor.

Figure 1: MRCBQ REIT’s portfolio snapshot

SOURCES: CIMB, COMPANY REPORTS

*excludes car park bays; includes Menara Shell

Where are the properties?

Since listing, the group has successfully increased its area under management from 493.1m sq ft in 2007 to 2.2m sq ft by end-2016F (including Menara Shell). Of its 11 properties, five are located in Cyberjaya, two in KL Sentral, two in Kuala Lumpur city centre, one in Selangor and one in Penang. The bulk of its assets are strategically-located prime office buildings in addition to retail assets and a car park.

Figure 2: NLA*, by geographical location at end-2016F Figure 3: AUM*, by segment at 2Q16


*includes Menara Shell SOURCES: CIMB, COMPANY REPORTS

*does not include Menara Shell

Details

Portfolio size 11 properties

Total area under management (sq ft) 2,256,296*

Total assets under management (RM m) 2,266

Average occupancy rates (%) 98.0%

WALE (years) 5.81

2015 gross income (RMm) 115.2

2015 net property income (RMm) 90.3

2015 DPU (sen) 8.47

Title:

Source:

Please fill in the values above to have them entered in your report25%

10%

46%

3%

3%

12%

Cyberjaya KL City Centre KL Sentral Mont' Kiara Selangor Penang

Title:

Source:

Please fill in the values above to have them entered in your report

82%

13%

2% 3%

Office Retail assets Other commercial building Car park


3

A well-diversified mix of tenants

MQREIT’s portfolio is mostly occupied by quality and noteworthy tenants, which comprise a mix of multi-national companies (MNCs), government-linked companies (GLCs) as well as local companies. The group has a relatively equal mix of single-tenanted properties (c.46% of total NLA) and multi-tenanted properties (c.54% of total NLA). Note that even though the group has a higher proportion of multi-tenanted properties, the bulk of them have an established MNC or GLC as the anchor tenant.

We believe that the group’s overall portfolio occupancy risk is well diversified as most of its tenants are exposed to different industries and the group is not tied to any one sector. Also, most of its key tenants (which are made up of major global MNCs) have tied up with MQREIT to establish their respective unique built-to-suit global data processing and information services centres; and this also limits downside risks for the REIT (i.e. non-renewals and early terminations), in our view.

Figure 4: Breakdown of tenants based on NLA (multi-tenant vs. single-tenant)* at end-2016F

Figure 5: Tenancy mix (by NLA)* at 2Q16


*includes Menara Shell SOURCES: CIMB, COMPANY REPORTS

*does not include Menara Shell

We believe that the multi-tenanted leases provide the group an avenue to leverage the growth of current market rental rates for positive reversions, while its single-tenanted leases offer a stable and steady income stream on the back of built-in escalated rental rates every 2-3 years over the period of the lease. We also note that the maintenance costs for most of its single-tenanted properties are borne by the tenant, which translates into lower maintenance costs for the group as a whole.

Title:

Source:


54%

46%

Multi-tenant Single tenant

Title:

Source:


24.0%

18.0%

7.0%

21.0%

15.0%

2.0%

11.0%1.0%

Retail GLCs IT/Electronics Oil & gas Logistics Automotive Banking Education


4

Higher-than-average effective average occupancy rates

Despite the oversupply situation that has been plaguing the office space industry, MQREIT’s properties have consistently maintained higher-than-average occupancy rates of more than 90% (vs. industry average of about 81%) over the past five years, which further reinforces and strengthens the group’s strategy of constructing purpose-built office buildings for its tenants. Through its built-to-suit strategy for its tenants, MQREIT is able to lock in long-term leases of at least five to 10 years. For example, Quill Building 1 and 4 (DHL 1 and 2) house one out of the three DHL Global Information Services Centres around the globe and are on a 10-year long-term lease with MQREIT.

Figure 6: MQREIT’s portfolio vs. overall office industry occupancy rates in Kuala Lumpur

SOURCES: COMPANY REPORTS, NAPIC

Expiry lease schedule well managed and spread out

The projected tenancy expiry schedule remains relatively well distributed, save for 2018F being chunkier with 26% of occupied NLA up for renewal. While there is a higher percentage of leases expiring in 2018F, the bulk of it will mostly come from Wisma Technip (which is currently occupied by Technip Geoproduction (M) SB – an oil and gas (O&G) company).

Although negotiations for lease renewal for Menara Technip have not commenced, we believe that Technip will most likely renew its lease, which will expire in Dec 2018, barring any unforeseen circumstances. We understand that Technip is currently sub-letting a few floors to several contractors. Nonetheless, we believe that there is minimal non-renewal risk as Technip remains a good paymaster. We note that renewal risk for expiring tenancies has been low for the group and it has managed to consistently deliver renewal rates of more than 90% over the past five years, save for 2012 when BMW negotiated to reduce its overall occupied space in Quill Building 3.

Title:

Source:


83.2%80.8% 80.4%

76.1% 79.0%83.3% 81.2%

100% 100% 99%95%

92% 91%

98%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY09 FY10 FY11 FY12 FY13 FY14 FY15

Occupancy rates (MQREIT) Occupancy rates (Overall office occupancy rates)


5

Figure 7: Projected tenancy expiry schedule (in terms of % occupied NLA)

Figure 8: MQREIT's renewal rates (2011-2015)

SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS

Additionally, the group’s weighted average lease expiry (WALE) for its entire portfolio of 5.8 years (by NLA) is higher than the average WALE of its peers under our coverage, which stood at 2.6 years as at 2Q16. This suggests that the group’s earnings are not as vulnerable to slumps or fluctuations in the rental market given its longer-term leases and that it is relatively shielded from the consequences usually experienced by players in a saturated office space industry, in our view.

Figure 9: Weighted average lease expiry (WALE)


*as at FY15

Title:

Source:


12.7% 13.0%

26.0%

11.0%

43.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

2016F 2017F 2018F 2019F 2020 - 2032F

Title:

Source:


85%

73%

98% 97%94%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013 2014 2015

Company As at 2Q16 (based on NLA)

Axis REIT 4.3

Pavilion REIT 1.1*

Sunway REIT 2.0

CMMT 1.5

Average 2.6

MQREIT 5.8


6

SHAREHOLDING AND SPONSOR STRUCTURE

Binary pillar of reputable sponsors provides abundant inorganic growth opportunities

MQREIT has one of the strongest-backed domestic-acquisition pipelines as compared to the other M-REITs, given its distinctive positioning and its ability to leverage the networks of two of its established construction and property co-sponsors, MRCB and Quill Group. Additionally, both of its largest unitholders are also the biggest shareholders of MRCB Quill Management SB (MQM) – the REIT manager – and are highly involved in the management services and day-to-day operations of the assets owned by the REIT.

Figure 10: MQREIT’s shareholding structure


MRCB is currently listed on Bursa Malaysia and is one of the country’s biggest construction-cum-property developers, with property gross development value (GDV) worth RM50.2bn and an outstanding construction order book worth RM5.7bn as of 2Q16. It is the single largest unitholder in MQREIT and shareholder in MRCB Quill Management SB (MQM), effectively holding a 31.2% stake and 41% stake, respectively, post the injection of Platinum Sentral back in Mar 2015. Note that MRCB took over from CapitaLand RECM Pte Ltd as co-sponsor back in Mar 2015, which means MQREIT has the First Right of Refusal (ROFR) to acquire any commercial assets to be disposed of by MRCB.

Figure 11: MQM’s shareholding structure


Title:

Source:


31.2%

17.7%17.7%

33.4%

MRCB Quill Group CCT Others

Title:

Source:


31.2%

17.7%17.7%

33.4%

MRCB Quill Group CCT Others


7

Meanwhile, the Quill Group of companies collectively holds a 17.7% stake in MQREIT and a 39% stake in MQM. The Quill Group stands today as one of Malaysia’s foremost fully-integrated multidisciplinary property groups and is an established one-stop resource in the business of financing, fast-track design, construction and lease-back of purpose-built buildings and facilities, particularly for global MNCs.

An added potential bonus: EPF

Besides the potential pipeline of assets from the group’s reputable sponsors, we believe the largest pension fund in Malaysia, the Employees Provident Fund (EPF), could also inject some of its assets into MQREIT given that it is the single largest shareholder of MRCB, with a 38.4% stake (as at end-2015). As at Dec 2015, the EPF had real estate and infrastructure investments totaling a massive RM22bn. More significantly, EPF had, in 2011, bought over the 29-storey office building known as Quill Building 7 (Menara Axiata) from the Quill Group for RM428m.


8

INDUSTRY OUTLOOK

Office space glut casts shadow over outlook for the sub-sector…

The office sector in Malaysia remains insipid, in our view, as the lacklustre demand and oversupply dynamic remain a concern. As a result of vastly expanding office spaces, which have risen by c.20% over the past five years, occupancy rates for purpose-built offices (both government and private buildings) have remained rather stagnant, averaging at about c.81%.

Figure 12: Average occupancy rates of purpose-built office buildings in Klang Valley (2006-2015)

SOURCES: NAPIC

We expect the environment for the office sub-segment to remain challenging in the coming years. Currently, the cumulative supply of office spaces in the Klang Valley (which includes Putrajaya and Cyberjaya) stands at c.111.3m sq ft (as at 2Q16) and is expected by Jones Lang Wootton to grow by 13.2% to 125.9m sq ft by 2018F. Hence, the overall market will still largely remain a tenant’s market, in our view, where building owners are expected to be more competitive in negotiating tenancy renewal terms (e.g. offer free-rent periods, discounted rents) to safely retain and secure quality tenants as well as to attract new tenants.

Title:

Source:


81.8%

83.1%

82.4%

83.2%

80.8%80.4%

76.1%

79.0%

83.3%

81.2%

72.0%

74.0%

76.0%

78.0%

80.0%

82.0%

84.0%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015


9

…but not all doom and gloom for prime, dual-compliant office assets

Nonetheless, we gather that a trend has emerged where tenants are becoming more astute and particular about the condition and quality of the buildings. Hence, we believe that the term ‘survival of the fittest’ very much befits this competitive environment, where older office spaces have to either be significantly refurbished and/or restored in order to retain a slice of the pie.

Figure 13: Average occupancy rates for Grade A office buildings in GTKL, CBD and KL Sentral region (1Q13-2Q16)

Figure 14: Average occupancy rates for Grade A office buildings in Cyberjaya, PJ, SJ and Shah Alam (1Q15-2Q16)

SOURCES: KNIGHT FRANK SOURCES: KNIGHT FRANK

Evidently, rental and occupancy rates of Prime A+ and Grade A office buildings have held their ground even in the presence of a supply glut in the industry. We believe these offices have been able to sustain their occupancy and rental rates mainly due to their dual-compliant (MSC and Green certification) status as well as their prime locations.

Figure 15: Average rental rates for Grade A office buildings in GTKL, CBD and KL Sentral region (1Q13-2Q16)

Figure 16: Average rental rates for office buildings in Cyberjaya, PJ, SJ and Shah Alam (1Q15-2Q16)

SOURCES: KNIGHT FRANK SOURCES: KNIGHT FRANK

Separately, according to a study done by the International Journal of Economics and Management on office buildings in the ‘Golden Triangle’ of KL in 2015, there was a much higher correlation between Green and MSC-certified buildings and higher rental rates, than there was to uncertified buildings. We think that this can be attributed to the evolution of the concept of sustainability and its increasing importance in the overall global environment, where tenants (particularly MNCs) seek green buildings to cut operating costs as well as to support corporate environmental and social responsibility targets.

Title:

Source:


50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

80.0%

85.0%

90.0%

95.0%

100.0%

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16

Golden Triangle Prime A+

Central Business District (CBD) Grade A

KL Sentral Grade A

Mid Valley City/Bangsar/Pantai (MBP) Grade A

Title:

Source:


0% 20% 40% 60% 80% 100%

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

Cyberjaya Grade A Shah Alam Grade A

Subang Jaya Grade A Petaling Jaya Grade A

Title:

Source:


4.00

5.00

6.00

7.00

8.00

9.00

10.00

11.00

12.00

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16

(RM/psf)

Golden Triangle Prime A+

Central Business District (CBD) Grade A

KL Sentral Grade A

Mid Valley City/Bangsar/Pantai (MBP) Grade A

Title:

Source:


0.00 1.00 2.00 3.00 4.00 5.00 6.00

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

(RM/psf)

Cyberjaya Grade A Shah Alam Grade A

Subang Jaya Grade A Petaling Jaya Grade A


10

KEY INVESTMENT HIGHLIGHTS

Built-to-suit asset strategy lends resilience despite excessive office supply

While the overall current outlook for the country’s office space remains passive, we still think that the demand for the group’s properties will remain resilient and continue to hold its ground, particularly for its assets in KL Sentral (namely Platinum Sentral and Menara Shell by end-2016F). Given the dearth of strategically situated and quality office assets, we believe MQREIT’s strength lies in the locations of its office properties, whereby it can leverage KL Sentral’s prime connectivity and business convenience, which presents plenty of demand opportunities for its commercial properties.

Figure 17: Locations of MQREIT’s existing properties*

SOURCES: CAPITALAND COMMERCIAL TRUST

*map has not included Platinum Sentral and Menara Shell

Additionally, the group owns several other properties in the KL city centre, Cyberjaya (Malaysia’s Multimedia Super Corridor) as well as in PJ, Selangor. Aside from the retail portion of Plaza Mont Kiara, most of the group’s properties consist of built-to-suit and single-tenanted offices housing high quality global MNC tenants. The top three major tenants (in terms of NLA) are global MNCs with long-term leases, each in different industries, namely, Shell People Services Asia SB (Shell), DHL Express (DHL) and Tesco PLC (Tesco), which diminishes the risk of reliance on any one particular industry. This provides the group with long-term income stability and limits the impact of any potential tenant default, in our view. Furthermore, rental contributions from these three properties are less erratic as Shell, DHL and Tesco are all locked down in long-term leases of 15, 10 and 28 years, respectively.


11

Figure 18: MQREIT’s tenancy breakdown post injection of Menara Shell (in terms of NLA)


Strong ROFR pipeline from sponsors

As MQREIT is the only REIT with a dual-sponsorship structure, we believe the group has significant potential to grow inorganically in the form of possible asset injections from its sponsors’ existing asset pipelines. MQREIT currently owns the Right of First Refusal (ROFR) to acquire any commercial assets to be disposed of by MRCB and Quill Group. Also, we have listed and identified assets that could be injected into the REIT’s portfolio in the foreseeable future. In total, we estimate that MRCB has a total pipeline of properties worth RM2.1bn while the Quill Group has c.RM1bn worth of properties to potentially be injected into the group’s portfolio over the next few years.

Figure 19: Potential asset injections from Quill Group and MRCB

SOURCES: MRCB, QUILL GROUP, CIMB

*on-going acquisition of Menara Shell to be completed by end-2016

We believe that these potential asset injections provide the group with acquisition visibility all the way till 2018-2019F and that they could further fortify the group’s position as one of the country’s most prominent and exclusive office REITs given its strategic positioning in the nucleus of KL as well as Malaysia’s ‘Silicon Valley’ – Cyberjaya. Aside from these potential assets, the group has stated that it will also continue to actively engage in sourcing for viable properties from third-party vendors.

Menara Celcom the next potential injection?

Subsequent to the completion of the acquisition of Menara Shell, we think Menara Celcom (Celcom Tower) will most likely be injected into its portfolio. The construction of Menara Celcom, nestled within the PJ Sentral Garden City, is slated for completion by 4Q17 and is estimated to be worth a total GDV of RM535m according to MRCB. We understand that the group’s sponsor, MRCB, has already agreed to sign a built-to-lease agreement with mobile

Title:

Source:


13.6%

12.2%

11.4%

10.3%8.2%6.2%

38.1%

Shell Tesco DHL Technip HSBC AmGeneral Others

Potential asset

injections from Quill

Group Location Tenant

Estimated market

value (RMm) Completion date

Quill Building 6 Lebuh Ampang, KL HSBC 250 Completed

Quill Building 9 Section 14, Petaling Jaya Quill Group 300 Completed

Quill Building 18 Cyberjaya Multi-tenanted 450 Completed

Total 1,000

Potential asset

injections from MRCB Location Tenant

Estimated market

value (RMm) Completion date

Menara Shell* KL Sentral Shell 640 Completed

Celcom Tower PJ Sentral Celcom 535 2017

MBSB Tower PJ Sentral MBSB 262 2017

MyIPO Tower PJ Sentral N/A 274 2017

Putrajaya Office Tower PJ N/A 399 2017

Total 2,110


12

telecommunications provider Celcom for the lease of the entire property for a total of 15 years after the completion of its development. Based on the reported rental rates of c.RM5.00-5.50 per sq ft (for Prime A office buildings by Malaysia’s NAPIC) and ballpark NLA estimates of 450,000 sq ft, we estimate that Menara Celcom could lift the group’s revenue by 14-15% (assuming full contribution in FY19F). We think the injection of this tower could come by end-2018F and boost the group’s total asset value under management to an admirable c.RM2.7bn.

Asset enhancements to improve organic growth to spur further upside

Meanwhile, we expect future organic growth to come from higher positive rental reversions as a result of completed asset enhancement initiatives (AEIs) to upgrade and enhance the properties under its portfolio. While the group has not embarked on any massive AEIs in the past few years, we note that MQREIT could expect to reap the gradual incremental benefits of systematic enhancement exercises being done on its existing properties. For 2016, the group added green feature enhancements to Quill Building 1 and 4 (DHL), enhanced its car park facilities in Plaza Mont Kiara (expected completion by end-2016F), upgraded the overall façade and driveway area for Wisma Technip and improved the lobby in Block A for Platinum Sentral.

Figure 20: Link bridge from Q-Sentral/Menara CIMB to Platinum Sentral

Figure 21: Link bridge from Platinum Sentral to KL Sentral

SOURCES: CIMB RESEARCH SOURCES: CIMB RESEARCH

As the link bridges between Sentral Residences, CIMB/Q Sentral, Platinum and KL Sentral are slated to be completed by Jan 2017, we believe the group will most likely embark on initiatives to enhance and improve the tenancy mix of Platinum Sentral. We gather that the group could look into converting otherwise vacant spaces (i.e. common areas) into rental-yielding space and add more cafes and F&B kiosks to improve the traffic flow in Platinum Sentral. As such, we believe the rental rates for Platinum Sentral could rise due to the improved tenant mix and floor space reconfiguration.


13

Figure 22: Potential NLA reconfiguration in Platinum Sentral Figure 23: Potential NLA reconfiguration in Platinum Sentral

SOURCE: CIMB RESEARCH SOURCE: CIMB RESEARCH

Potentially higher parking rates an additional treat

Aside from the organic growth from AEIs, we also do not rule out the possibility of MQREIT realigning its parking rates for Plaza Mont Kiara (PMK) to current market rates. Recall that effective July 2016, parking bays owned by the Kuala Lumpur City Hall (DBKL) within the central business district (which includes areas such as Bukit Damansara, Solaris Mont Kiara and Bangsar) experienced a considerable 150% jump in parking charges from RM0.80/hour to RM2 (first hour).

Figure 24: Old and new parking rates

SOURCES: CIMB

However, we understand that the group is still in the midst of reviewing its average monthly parking rates for PMK and Platinum Sentral and will only increase the rates when market and economic conditions allow. Thus, details are scant at this juncture in relation to the quantum of the potential hike. We have currently estimated that seasonal passes for PMK are priced at c.RM200-220/month and have not factored in a hike in parking rates in our forecasts.

Figure 25: Sensitivity analysis of % change in parking rates at PMK to car park income (RM m)

SOURCES: CIMB

Our quick sensitivity analysis shows that a 50% hike in parking rates could increase MQREIT’s FY17-18F revenue by 2.4-2.6% but this is only taking into account a parking rate hike for PMK. We note that the group still owns several highly coveted parking spaces in the KL Sentral region and has the scope to also boost rates in Platinum Sentral (637 car park lots) as well as Menara Shell (915 lots).

Younger age profile of Menara Shell leaves sufficient room for rental growth

Comparatively, gross rental rates at Menara Shell are still lower than that of the surrounding offices in the same area given its relatively younger age of two

Old rates New rates Old rates New rates

RM0.80 per hour RM2.00 (first hour) RM0.50 per hour RM1.50 per hour

RM3.00 (subsequent hour)

City Centre Outside city centre

Revenue FY17F FY18F

Current base case 198.6 213.2

+10% 0.5% 0.5%

+20% 1.0% 1.0%

+30% 1.6% 1.4%

+40% 2.1% 1.9%

+50% 2.6% 2.4%


14

years vs. the average age of five years. Hence, we believe that Menara Shell should also act as a growth driver for MQREIT given its younger age profile and its ability to command premium rental rates. The office will be going through its first cycle of rental reversion in Nov 2016 and we believe that this round of step-ups will see the majority of Menara Shell’s rental rates being revised up by at least 10-15%.

Figure 26: Current rental rates of offices in KL Sentral*

SOURCES: VARIOUS PROPERTY SOURCES

*current market rental rates are derived from property rental websites

Going forward, we expect demand for quality grade A office towers and buildings that are accredited with Green Building Index (GBI) Gold certifications to continue to rise and we believe these properties will command premium rentals as tenants continue to seek higher quality assets. Thus, given MQREIT’s strong management and successful track record, coupled with the decentralisation effect on office spaces in KL’s city centre, we believe that there is plenty of room for higher rental rates for Menara Shell as well as the other office buildings in KL Sentral.

SWOT analysis

We believe MQREIT’s key strength is its built-to-suit strategy for its single-tenanted buildings, which lowers occupancy risk. Nonetheless, we believe this could also be regarded as a weakness as most of its tenants are locked in for long-term leases, which results in lower positive rental reversion for its assets.

Figure 27: SWOT analysis

SOURCES: CIMB

Title:

Source:

Please fill in the values above to have them entered in your report6.75

7.508.00

7.508.00

6.90 7.00 7.50

8.75

0

1

2

3

4

5

6

7

8

9

10

PlazaSentral, KL

Sentral(Phase 1 & 2)

1 Sentral, KLSentral

MenaraCIMB

Quill 7(Menara

Axiata), KLSentral

1 Sentrum,KL Sentral

Q Sentral Nu Towers 1& 2, KL

Sentral

Menara Shell PlatinumSentral

(RM/psf)

Current rental rates (RM/psf) Average (RM/psf)

Strengths Opportunities

- Higher than average occupancy rates and strategically located office assets - Higher-than-expected rental reversions

- Strong backing from two co-sponsors - namely MRCB and Quill Group - Inorganic growth through the ROFR to its co-sponsor's office assets

- Experienced and strong management team - MQREIT's sponsors are also property developers, which provides better

transparency of future asset acquisitions

- Built-to-suit strategy for tenants, who are typically global MNCs - Improving capital value of its properties would provide more room for gearing

- Decent dividend yields of 6% to 7% - Upgrading works on assets could drive organic rental reversion growth

Weaknesses Threats

- Higher exposure to single tenanted office buildings - Worst-than-expected oversupply of new office space in the Klang Valley

- Long-term tenancies may result in unexciting yearly rental growth - Acquisition of less attractive assets (unattractively low occupnacy rates,

unappealing locations)

- Higher interest for commercial properties in Malaysia could increase the competition

for asset acquisitions, especially from third-party sellers

- The introduction of new and/or changes to existing REIT guidelines could affect

MQREIT


15

NEAR-TERM INORGANIC GROWTH – THE MENARA SHELL ACQUISITION

Making its second foray into KL Sentral

To recap, MQREIT had entered into a conditional sale and purchase agreement (SPA) with its major shareholder, MRCB, to acquire a 33-storey office tower (Menara Shell in KL Sentral) for a total cash consideration of RM640m. The proposed acquisition will most likely be completed by end-2016F and will boost the group’s total asset size from RM1.6bn to RM2.26bn. This acquisition will also mark the group’s second foray into KL Sentral and will further strengthen its position as a geographically well-diversified office REIT in the Klang Valley, in our view.

Acquisition to be financed through equity funding and borrowings

To fund the acquisition and estimated expenses, the group has proposed (back in June 2016) to undertake an equity-funding exercise that will involve the issuance of up to 406.7m units (61% of its current share base) to: i) MQREIT’s largest unitholder, MRCB, for a minimum amount of RM110m, but up to RM152m, ii) EPF, up to 7% of its enlarged unit base, and iii) other institutional investors by way of book-building.

Figure 28: Forecasted proposed placement exercise


*assuming maximum subscription of placement units amounting to RM152m; **assuming maximum subscription of placement units of up to 7% of enlarged share base

Meanwhile, the exact proportion of funding has not been determined at this juncture and will be contingent on the actual placement size and issue price of the placement units. Based on an illustrative share price of RM1.13 per unit (c.10% discount to current share price) and the maximum issuance of 406.7m units, we estimate total gross proceeds raised will amount to c.RM460m. Thus, in this scenario, we estimate that the group will borrow an additional c.RM197m for the remaining portion of the total amount needed and this will result in a 30:70 debt-to-equity funding structure.

Figure 29: Potential debt-to-equity funding structure


*assuming issue price of RM1.13; **assuming borrowings are taken after placement exercise

Shareholders Proposed placements (m units)

MRCB* 134.5

EPF** 74.8

Quill Group 0.0

CapitaCommercial Trust 0.0

Other institutional placees 197.4

Total 406.7

Title:

Source:


70%

RM460m*

30%

RM197m**

Equity Debt


16

Post-acquisition shareholding and placement exercise

As the single largest unitholder, MRCB has expressed its commitment to MQREIT and has stated that it will partake in the placement exercise, acting as a price taker to placement units of ≥RM110m but up to RM152m. However, it will not participate in the book-building exercise. We have a positive view of this as we believe it further solidifies and secures MRCB’s commitment towards MQREIT’s future prospects. This also provides the REIT with more visibility and transparency of the potential assets flow.

Figure 30: Forecasted pre- and post-placement unit holding structure


*assuming maximum subscription of placement units amounting to RM152m at RM1.13; **assuming maximum subscription of placement units of up to 7% of enlarged share base

Additionally, EPF has articulated its interest to subscribe to up to 7% (based on the enlarged share base of 1,068m units) and will correspondingly submit its bid via the book-building exercise for the proposed placement. Meanwhile, we also understand that the group’s second- and third-largest shareholders, Quill Group and CapitaCommerical Trust (both effectively holding up to a c.17.7% stake each), are content with their current shareholding and will not be increasing their stakes in the company.

Unitholders

Units (m) % Units (m) %

MRCB* 206.3 31.2% 340.8 31.9%

EPF** 3.0 0.5% 77.8 7.3%

Quill Group 117.0 17.7% 117.0 11.0%

CapitaCommercial Trust 117.0 17.7% 117.0 11.0%

Others 218.1 33.0% 218.1 20.4%

Other institutional placees - - 197.4 18.5%

Total 661.4 100.0% 1068.1 100.0%

Current holdings Post-placement holdings


17

KEY RISKS

Higher-than-average gearing ratio near the statutory limit but still under control

Post the placement exercise and additional borrowings undertaken to fund the acquisition, we estimate that MQREIT’s gearing ratio will likely fall to 0.4x (from 0.42x previously). Comparatively, its peers’ average gearing ratio currently hovers at a lower 0.32x. While the group’s gearing ratio is fairly near the statutory limit of 0.5x, we are not overly concerned and believe that this is still manageable as it still has c.RM230m of debt headroom for future purchases. Nonetheless, we envisage future acquisitions to be financed by a blend of debt and equity, which will, in turn, also improve the REIT’s overall trading liquidity and capital management, in our view.

Interest rate risk

As REITs are required to pay out at least 90% of their distributable income, this limits their ability to conserve and boost their balance sheets. Thus, REITs typically rely on debt when it comes to financing their assets. An interest rate hike may be damaging to the REIT’s ability to generate higher distributable income as interest expenses climb. As a result, we think investors will seek shelter in safer returns, such as risk-free treasuries.

Nonetheless, we believe that this is mitigated by the fact that MQREIT locks in 100% of its debt on a fixed rate and has a longer-than-average debt to maturity of at least 2.6 years compared to its peers. This suggests that MQREIT is less exposed to interest rate risk vs. other M-REITs.

Non-renewal and default risk

We believe tenancy renewal risk is low for the group given that the majority of its key tenants consist of highly reputable MNCs that have already committed and invested substantially in setting up their respective global data processing and information services centres in Malaysia. Additionally, we believe that the group’s rental rates will hold steady given the limited availability of prime offices in Cyberjaya.

We also believe that default risk is minimal given that almost all of its tenants are efficient paymasters. Its top five tenants are leading global MNCs – namely Shell, Tesco, DHL, Technip and HSBC – all of whom are leaders in their respective markets.

High occupancy rates: a double-edged sword

While the group has always enjoyed above-average occupancy rates of >95%, which has helped it thrive despite the abundant office supply in the market, this comes at the expense of organic growth as most of its properties only witness yearly rental renewals of 2-3% (due to the longer-term lease nature).

Nonetheless, going forward, we expect the group’s rental reversion rates to improve in tandem with the addition of multi-tenanted buildings in highly sought-after locations (i.e. Menara Shell and Platinum Sentral) which we believe should be able to command higher rental reversions. Also, we think that potential value-accretive acquisitions will help counterbalance the lower rental rates and drive the group’s earnings growth in the long term.


18

FINANCIAL ANALYSIS

Admirable financial performance over the past three years

Over the past three years, MQREIT has managed to chalk up commendable revenue and core earnings growth of 18.4% yoy and 16.2% yoy, respectively. The group’s double-digit top- and bottomline growth can mainly be attributed to the injection of Platinum Sentral into its property portfolio back in Mar 2015 which boosted core earnings by 58.1% yoy.

Figure 31: MQREIT's revenue and revenue growth (FY12-15) Figure 32: MQREIT's NP and NP growth (FY12-15)


Projecting 3-year core net profit growth of 22.3%

Core earnings have been rather bland over the past few years due to the lack of asset injections (the most recent being Tesco Penang in 2008 prior to Platinum Sentral in 2015) as well as its low single-digit rental reversion rates (due to its long-term leases). However, we think the group’s historically unexciting rental reversion rates will get a new lease on life with the inclusion of Platinum Sentral and Menara Shell into its portfolio.

Going forward, we are forecasting 3-year CAGR net profit of 22.3% over FY15-18F, mainly driven by the positive rental reversion rates of Menara Shell and Platinum Sentral, which are comparatively more diverse in terms of tenants (multi-tenanted) and situated in prime locations, likely enabling the group to command premium rental rates.

Figure 33: Revenue and NP (FY15-FY18F)


We forecast 2016F core net earnings to grow by 11.2% yoy, driven by the full-year impact of Platinum Sentral as well as the impact of positive rental reversions from Quill Building 1 and 4 (DHL), the leases for which were renewed in Jan 2016. Meanwhile, FY17F’s growth emanates from the full-year

Title:

Source:


69.5 68.9 70.2

115.2

-1.2% -0.7%1.9%

64.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

FY12 FY13 FY14 FY15

(RMm)

Revenue Revenue growth (%)

Acquisition of Platinum

Sentral in March 2015

Title:

Source:


34.4 34.5 34.2

54.0

-1.2% -1.8%0.2%

69.3%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

0.0

10.0

20.0

30.0

40.0

50.0

60.0

FY12 FY13 FY14 FY15

(RMm)

Core net profit Core net profit growth (%)

Title:

Source:


115.2

133.3

198.6

213.2

54.060.1

92.498.8

0.0

50.0

100.0

150.0

200.0

250.0

FY15 FY16F FY17F FY18F

(RMm)

Revenue NP


19

impact of the Menara Shell addition and, subsequently, we expect the group to grow its earnings organically by c.7% in FY18F via positive rental reversions and sustained high occupancy rates from its properties.

Payout ratio increased to 100% to offset DPU-dilutive placement exercise

MQREIT’s current distribution policy is to pay at least 90% of its distributable income to unitholders. We note that the group has consistently paid out more than 95% of its distributable income over the past five years. While we expect FY17F core earnings to grow by c.54% yoy with the inclusion of Menara Shell, we note that the placement exercise will be EPU- and DPU-dilutive given the substantial equity dilution (based on the maximum placement of 406.7m units).

Figure 34: MQREIT’s DPU and dividend yield (%) (FY10-FY18F)


However, we understand that the group targets to offset the dilution by increasing its payout ratio to 100% until DPU stabilises and reverts to its current levels (FY15: 8.47 sen). Hence, we have imputed a 100% payout ratio for FY17F, which translates to a relatively flattish DPU of 8.65 sen (vs. FY16F: 8.63 sen). We are optimistic on the DPU-accretion from FY18F and beyond given the recent asset additions and developments that will improve the overall asset portfolio.

Balance sheet analysis: gearing ratio still manageable

As at end-FY15, MQREIT’s gearing ratio stood at 0.42x, which is fairly close to the Securities Commission’s (SC) gearing cap of 0.5x. After taking into account the additional borrowings and enlarged total asset base, we expect the group’s gearing ratio to moderate to 0.4x. This will give it debt capacity of c.RM230m for future purchases.

Figure 35: Projected gearing ratio pre and post acquisition


*based on placement of 406.7m units and at issue price of RM1.13; **additional debt assumed for remaining funding required

Moving forward, we believe that its future acquisitions will most likely be funded by a combination of debt and equity, as cost of capital has come down due to the combination of lower debt funding costs (for now) and cheaper equity driven by a rising share price. This should ensure optimal capital management, which will, in turn, also improve the group’s overall trading liquidity, in our view.

Title:

Source:


8.03

8.30

8.38 8.38 8.38

8.47

8.63 8.65

8.78

6.0%

6.1%

6.2%

6.3%

6.4%

6.5%

6.6%

6.7%

6.8%

6.9%

7.0%

7.1%

7.60

7.80

8.00

8.20

8.40

8.60

8.80

9.00

FY10 FY11 FY12 FY13 FY14 FY15 FY16F FY17F FY18F

(sen)

DPU (sen) Dividend yield (%)

Gearing ratio pre- and post-placement

Current gearing (x) 0.42

Current no. of units (m) 661.4

Equity raised (RMm)* 460.0

Additional borrowings (RMm)** 197.0

Post-placement gearing (x) 0.40

Post-placement no. of units (m) 1,068.0


20

100% of debt on fixed rate; interest rate risk contained

Given that 100% of the group’s borrowings are based on a fixed rate, the interest expenses for the group are predictable and will not be subjected to any fluctuations in interest rates. Thus, interest rate risk for the group is covered, in our view. Moreover, the group’s operating cash flow generation of c.RM85m p.a. is sufficient to meet its yearly interest payments.

Meanwhile, its average debt to maturity currently stands at 2.6 years, higher than the average 1.9 years of the other listed office REITs in the market, which means the group has a well spread out debt maturity profile, reducing its refinancing risk, in our opinion. MQREIT’s debt maturity is staggered, with 17% of its total debts due in 2018F and 56% in 2020F.

Figure 36: 100% borrowings on fixed rate Figure 37: MQREIT’s debt maturity profile


Figure 38: Debt maturity and cost of debt of other listed office REITs


Title:

Source:


Fixed rate100%

Total average borrowings:

RM696m (as at

2QFY16)

117

389

0

50

100

150

200

250

300

350

400

450

2017F 2018F 2019F 2020F

Company AUM (RMm) Debt maturity (years) Cost of debt

AmFirst REIT 1,628 3.1 4.70%

Tower REIT 559 1.0 4.09%

UOA REIT 1,130 1.0 4.30%

MQREIT 2,272 2.6 4.40%

Average 1.9 4.37%


21

VALUATION AND RECOMMENDATION

Initiating coverage with an Add and DDM-based target price of RM1.40

We begin coverage on MQREIT with an Add rating. We are using the dividend discount model (DDM) methodology as our primary valuation methodology as we believe that DPU (given the nature of REITs) rather than EPU, is a more appropriate metric, as it directly affects yields. We employ a risk-free rate assumption of 3.6% (in line with the 10-year MGS), 6.0% equity risk premium and beta of 0.7x, with terminal growth of 1.5%, to arrive at a DDM value per share of RM1.40. Our target price provides a total return of c.17%.

We like MQREIT for its: i) strategically located and high-quality assets, which have shielded it from the consequences other players face given the supply glut in the office sub-sector, ii) visible asset injection pipeline of potentially yield-accretive acquisitions from its asset-rich sponsors, iii) positive upward rental reversion from its recently-added properties and further asset enhancement initiatives, and iv) established track record of steady income from its solid office assets, where occupancy rates have remained consistently high and rental rates have risen even in a depressed office rental market.

Figure 39: Dividend discount model methodology


Currently, MQREIT is trading at attractive implied 6.8-6.9% FY16-17F dividend yields, which are above the average FY16-17F yields of 5.5-5.8%. The group is also trading at an implied FY17F P/BV valuation of 1.0x, below its peers’ average of 1.3x, which suggests plenty of upside potential for the company.

Figure 40: Sector Comparisons


More potential for yield compression?

Even though average dividend yields for M-REITs are currently in line with mean valuations, we think there is more potential for yield compression, led by organic and inorganic earnings growth prospects. We continue to believe that REIT players with prudent management, strong execution capabilities, high-quality assets located in prime areas and a visible asset injection pipeline should provide investors with better DPU and capital appreciation growth in the longer term. Additionally, we think that if market volatility persists, investors will continue on their quest for high-yielding and steady names in a risk-off environment. Thus, we believe MQREIT should be a beneficiary of this yield compression environment.

Key valuation assumptions

Risk free rate (Rf) 3.6%

Equity risk premium (%) 6.0%

Levered beta (x) 0.7

Cost of equity (Ke) 7.6%

Terminal value (RMm) 145.6

Terminal growth rate (TG) 1.5%

DDM-based target price (RM) 1.40

Total absolute return (%) 17.1%

Share

price

Target

Price

(local

curr)

(local

curr)CY16F CY17F CY16F CY17F CY16F CY17F CY18F CY16F CY17F CY16F CY17F

Axis REIT AXRB MK Hold 1.71 1.86 451 19.2 18.1 3.6% 1.39 1.39 7.0% 7.6% 8.1% 38.1% 38.1% 5.2% 5.5%

CapitaMalls Malaysia Trust CMMT MK Hold 1.53 1.65 741 18.3 17.4 5.4% 1.16 1.17 6.1% 6.7% 7.0% 35.6% 35.9% 5.9% 6.3%

IGB REIT IGBREIT MK Hold 1.60 1.62 1,331 30.7 27.5 4.9% 1.54 1.56 4.8% 5.6% 5.9% 26.5% 26.6% 5.5% 5.9%

KLCC Property Holdings KLCCSS MK Hold 7.83 7.35 3,370 17.5 16.7 5.8% 1.09 1.09 6.1% 6.5% 6.9% 16.2% 16.0% 4.5% 4.8%

MRCB-Quill REIT MQREIT MK Add 1.27 1.40 200 14.0 11.5 1.2% 0.93 0.99 6.5% 8.4% 7.3% 43.9% 39.7% 6.8% 6.9%

Pavilion REIT PREIT MK Add 1.79 1.92 1,290 20.7 19.8 6.8% 1.41 1.41 6.6% 7.1% 7.6% 28.2% 28.4% 5.0% 5.3%

Sunway REIT SREIT MK Hold 1.72 1.74 1,208 18.9 17.9 3.6% 1.51 1.52 7.9% 8.5% 8.9% 38.2% 38.8% 5.5% 5.9%

Average 19.9 18.4 4.5% 1.29 1.30 6.4% 7.2% 7.4% 32.4% 31.9% 5.5% 5.8%

P/BV (x) Recurring ROE (%)EV/EBITDA

(x)

Dividend

Yield (%)Company

Bloomberg

Ticker

Reco

m.

Market

Cap

(US$ m)

Core P/E (x)3-year

DPS

CAGR

(%)


22

BY THE NUMBERS

SOURCE: CIMB RESEARCH, COMPANY DATA

30.0%

32.8%

35.6%

38.4%

41.2%

44.0%

0.700

0.750

0.800

0.850

0.900

0.950

Jan-12A Jan-13A Jan-14A Jan-15A Jan-16F Jan-17F

P/BV vs Asset Leverage

Rolling P/BV (x) (lhs) Asset Leverage (rhs)

6.000%

6.129%

6.257%

6.386%

6.514%

6.643%

6.771%

6.900%

0.08000

0.08100

0.08200

0.08300

0.08400

0.08500

0.08600

0.08700

Jan-12A

Jan-13A

Jan-14A

Jan-15A

Jan-16F

Jan-17F

12-mth Fwd FD Normalised P/E vs FD Normalised EPS Growth

DPS (lhs) Dividend Yield (rhs)

Profit & Loss

(RMm) Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F

Rental Revenues 59.16 99.48 117.53 182.79 197.35

Other Revenues 11.09 15.69 15.75 15.80 15.86

Gross Property Revenue 70.25 115.17 133.28 198.59 213.21

Total Property Expenses (16.92) (24.90) (33.95) (53.27) (61.36)

Net Property Income 53.33 90.27 99.32 145.32 151.86

General And Admin. Expenses 0.05 (0.38) (0.38) (0.50) (0.50)

Management Fees (5.39) (8.55) (9.27) (13.28) (13.49)

Trustee's Fees (0.26) (0.44) (0.47) (0.67) (0.67)

Other Operating Expenses (0.23) (0.42) (0.42) (0.42) (0.42)

EBITDA 47.49 80.48 88.78 130.46 136.78

Depreciation And Amortisation (0.01) (0.01) (0.01) (0.01) (0.01)

EBIT 47.48 80.47 88.77 130.44 136.77

Net Interest Income (13.33) (27.06) (28.73) (38.07) (38.07)

Associates' Profit 0.00 0.00 0.00 0.00 0.00

Other Income/(Expenses) 0.00 0.00 0.00 0.00 0.00

Exceptional Items 6.12 7.27 0.00 0.00 0.00

Pre-tax Profit 40.27 60.68 60.04 92.38 98.70

Taxation 0.00 0.00 0.00 0.00 0.00

Minority Interests 0.00 0.00 0.00 0.00 0.00

Preferred Dividends 0.00 0.00 0.00 0.00 0.00

Net Profit 40.27 60.68 60.04 92.38 98.70

Distributable Profit 32.69 50.92 57.05 92.39 93.78

Cash Flow


Pre-tax Profit 40.27 60.68 60.04 92.38 98.70

Depreciation And Non-cash Adj. 13.34 27.07 28.74 38.08 38.08

Change In Working Capital (3.15) 6.43 (5.88) (2.56) 3.63

Tax Paid 0.00 0.00 0.00 0.00 0.00

Others (6.12) (7.20) 0.00 0.00 0.00

Cashflow From Operations 44.35 86.98 82.90 127.90 140.42

Capex (6.02) (751.92) (3.00) (658.00) (2.00)

Net Investments And Sale Of FA 0.98 29.07 3.00 4.00 5.00

Other Investing Cashflow 0.73 (1.52) 0.93 0.93 0.93

Cash Flow From Investing (4.30) (724.38) 0.93 (653.07) 3.93

Debt Raised/(repaid) 0.00 389.00 0.00 196.50 0.00

Equity Raised/(Repaid) 0.00 342.00 0.00 459.53 0.00

Dividends Paid (32.69) (38.71) (57.05) (92.39) (93.78)

Cash Interest And Others (13.33) (27.06) (28.73) (38.07) (38.07)

Cash Flow From Financing (46.02) 665.23 (85.78) 525.58 (131.85)

Total Cash Generated (5.98) 27.83 (1.95) 0.40 12.50

Free Cashflow To Firm 40.77 (636.47) 84.76 (524.25) 145.27

Free Cashflow To Equity 26.71 (275.46) 55.10 (366.74) 106.28

We estimate revenue jump of 47% yoy in FY17F due to the acquisition of Menara Shell.

Acquisition of Menara Shell for RM656m (which includes RM16m for other expenses).


23

BY THE NUMBERS… cont’d

SOURCE: CIMB RESEARCH, COMPANY DATA

Balance Sheet


Total Investments 837.7 1,569.8 1,572.8 2,230.8 2,232.8

Intangible Assets 0.0 0.0 0.0 0.0 0.0

Other Long-term Assets 1.2 3.8 3.8 3.8 3.8

Total Non-current Assets 838.9 1,573.6 1,576.6 2,234.6 2,236.6

Total Cash And Equivalents 23.3 44.9 39.0 34.5 41.1

Inventories 0.0 0.0 0.0 0.0 0.0

Trade Debtors 6.1 5.6 6.5 9.7 10.5

Other Current Assets 0.0 1.1 1.1 1.1 1.1

Total Current Assets 29.4 51.6 46.6 45.3 52.6

Trade Creditors 12.2 13.6 8.6 9.2 13.6

Short-term Debt 0.0 188.9 188.9 188.9 188.9

Other Current Liabilities 2.3 2.5 2.5 2.5 2.5

Total Current Liabilities 14.5 205.0 200.0 200.7 205.0

Long-term Borrowings 305.1 500.8 500.8 697.3 697.3

Other Long-term Liabilities 7.5 15.6 15.6 15.6 15.6

Total Non-current Liabilities 312.6 516.4 516.4 712.9 712.9

Shareholders' Equity 541.3 903.9 906.9 1,366.4 1,371.3

Minority Interests 0.0 0.0 0.0 0.0 0.0

Preferred Shareholders Funds 0.0 0.0 0.0 0.0 0.0

Total Equity 541.3 903.9 906.9 1,366.4 1,371.3

Key Ratios

Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F

Gross Property Revenue Growth 1.9% 64.0% 15.7% 49.0% 7.4%

NPI Growth 0.2% 69.3% 10.0% 46.3% 4.5%

Net Property Income Margin 75.9% 78.4% 74.5% 73.2% 71.2%

DPS Growth 0.00% 1.07% 1.84% 0.28% 1.51%

Gross Interest Cover 3.38 2.88 2.99 3.35 3.51

Effective Tax Rate 0% 0% 0% 0% 0%

Net Dividend Payout Ratio 81% 84% 95% 100% 95%

Current Ratio 2.03 0.25 0.23 0.23 0.26

Quick Ratio 2.03 0.25 0.23 0.23 0.26

Cash Ratio 1.61 0.22 0.19 0.17 0.20

Return On Average Assets 4.66% 4.87% 3.70% 4.73% 4.32%

Key Drivers

Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F

Rental Rate Psf Pm (RM) N/A N/A N/A N/A N/A

Acq. (less development) (US$m) N/A N/A N/A N/A N/A

RevPAR (RM) N/A N/A N/A N/A N/A

Net Lettable Area (NLA) ('000 Sf) 1,290 2,256 1,699 1,699 1,699

Occupancy (%) 94.5% 95.9% 97.2% 97.2% 97.2%

Assets Under Management (m) (RM) 837.7 1,569.8 1,572.8 2,230.8 2,232.8

Funds Under Management (m) (RM) N/A N/A N/A N/A N/A

Additional borrowings of c.RM197m in FY17F to fund its Menara Shell acquisition.


24

DISCLAIMER #01

The content of this report (including the views and opinions expressed therein, and the information comprised therein) has been prepared by and belongs to CIMB and is distributed by CIMB.

This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

By accepting this report, the recipient hereof represents and warrants that he is entitled to receive such report in accordance with the restrictions set forth below and agrees to be bound by the limitations contained herein (including the “Restrictions on Distributions” set out below). Any failure to comply with these limitations may constitute a violation of law. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this report may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMB.

The information contained in this research report is prepared from data believed to be correct and reliable at the time of issue of this report. CIMB may or may not issue regular reports on the subject matter of this report at any frequency and may cease to do so or change the periodicity of reports at any time. CIMB is under no obligation to update this report in the event of a material change to the information contained in this report. CIMB has no, and will not accept any, obligation to (i) check or ensure that the contents of this report remain current, reliable or relevant, (ii) ensure that the content of this report constitutes all the information a prospective investor may require, (iii) ensure the adequacy, accuracy, completeness, reliability or fairness of any views, opinions and information, and accordingly, CIMB, or any of their respective affiliates, or its related persons (and their respective directors, associates, connected persons and/or employees) shall not be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof. In particular, CIMB disclaims all responsibility and liability for the views and opinions set out in this report.

Unless otherwise specified, this report is based upon sources which CIMB considers to be reasonable. Such sources will, unless otherwise specified, for market data, be market data and prices available from the main stock exchange or market where the relevant security is listed, or, where appropriate, any other market. Information on the accounts and business of company(ies) will generally be based on published statements of the company(ies), information disseminated by regulatory information services, other publicly available information and information resulting from our research.

Whilst every effort is made to ensure that statements of facts made in this report are accurate, all estimates, projections, forecasts, expressions of opinion and other subjective judgments contained in this report are based on assumptions considered to be reasonable as of the date of the document in which they are contained and must not be construed as a representation that the matters referred to therein will occur. Past performance is not a reliable indicator of future performance. The value of investments may go down as well as up and those investing may, depending on the investments in question, lose more than the initial investment. No report shall constitute an offer or an invitation by or on behalf of CIMB or its affiliates to any person to buy or sell any investments.

CIMB, its affiliates and related companies, their directors, associates, connected parties and/or employees may own or have positions in securities of the company(ies) covered in this research report or any securities related thereto and may from time to time add to or dispose of, or may be materially interested in, any such securities. Further, CIMB, its affiliates and its related companies do and seek to do business with the company(ies) covered in this research report and may from time to time act as market maker or have assumed an underwriting commitment in securities of such company(ies), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform significant investment banking, advisory, underwriting or placement services for or relating to such company(ies) as well as solicit such investment, advisory or other services from any entity mentioned in this report.

CIMB or its affiliates may enter into an agreement with the company(ies) covered in this report relating to the production of research reports. CIMB may disclose the contents of this report to the company(ies) covered by it and may have amended the contents of this report following such disclosure.

The analyst responsible for the production of this report hereby certifies that the views expressed herein accurately and exclusively reflect his or her personal views and opinions about any and all of the issuers or securities analysed in this report and were prepared independently and autonomously. No part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations(s) or view(s) in this report. CIMB prohibits the analyst(s) who prepared this research report from receiving any compensation, incentive or bonus based on specific investment banking transactions or for providing a specific recommendation for, or view of, a particular company. Information barriers and other arrangements may be established where necessary to prevent conflicts of interests arising. However, the analyst(s) may receive compensation that is based on his/their coverage of company(ies) in the performance of his/their duties or the performance of his/their recommendations and the research personnel involved in the preparation of this report may also participate in the solicitation of the businesses as described above. In reviewing this research report, an investor should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additional information is, subject to the duties of confidentiality, available on request.

Reports relating to a specific geographical area are produced by the corresponding CIMB entity as listed in the table below. The term “CIMB” shall denote, where appropriate, the relevant entity distributing or disseminating the report in the particular jurisdiction referenced below, or, in every other case, CIMB Group Holdings Berhad ("CIMBGH") and its affiliates, subsidiaries and related companies.

Country CIMB Entity Regulated by

Hong Kong CIMB Securities Limited Securities and Futures Commission Hong Kong

India CIMB Securities (India) Private Limited Securities and Exchange Board of India (SEBI)

Indonesia PT CIMB Securities Indonesia Financial Services Authority of Indonesia

Malaysia CIMB Investment Bank Berhad Securities Commission Malaysia

Singapore CIMB Research Pte. Ltd. Monetary Authority of Singapore

South Korea CIMB Securities Limited, Korea Branch Financial Services Commission and Financial Supervisory Service

Taiwan CIMB Securities Limited, Taiwan Branch Financial Supervisory Commission

Thailand CIMB Securities (Thailand) Co. Ltd. Securities and Exchange Commission Thailand


25

(i) As of October 17, 2016 CIMB has a proprietary position in the securities (which may include but not limited to shares, warrants, call warrants and/or any other derivatives) in the following company or companies covered or recommended in this report:

(a) -

(ii) As of October 18, 2016, the analyst(s) who prepared this report, and the associate(s), has / have an interest in the securities (which may include but not limited to shares, warrants, call warrants and/or any other derivatives) in the following company or companies covered or recommended in this report:

(a) -

This report does not purport to contain all the information that a prospective investor may require. CIMB or any of its affil iates does not make any guarantee, representation or warranty, express or implied, as to the adequacy, accuracy, completeness, reliability or fairness of any such information and opinion contained in this report. Neither CIMB nor any of its affiliates nor its related persons shall be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof.

This report is general in nature and has been prepared for information purposes only. It is intended for circulation amongst CIMB and its affiliates’ clients generally and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. The information and opinions in this report are not and should not be construed or considered as an offer, recommendation or solicitation to buy or sell the subject securities, related investments or other financial instruments or any derivative instrument, or any rights pertaining thereto.

Investors are advised to make their own independent evaluation of the information contained in this research report, consider their own individual investment objectives, financial situation and particular needs and consult their own professional and financial advisers as to the legal, business, financial, tax and other aspects before participating in any transaction in respect of the securities of company(ies) covered in this research report.

The securities of such company(ies) may not be eligible for sale in all jurisdictions or to all categories of investors.

Australia: Despite anything in this report to the contrary, this research is provided in Australia by CIMB Securities (Singapore) Pte. Ltd. and CIMB Securities Limited. This research is only available in Australia to persons who are “wholesale clients” (within the meaning of the Corporations Act 2001 (Cth) and is supplied solely for the use of such wholesale clients and shall not be distributed or passed on to any other person. You represent and warrant that if you are in Australia, you are a “wholesale client”. This research is of a general nature only and has been prepared without taking into account the objectives, financial situation or needs of the individual recipient. CIMB Securities (Singapore) Pte. Ltd. and CIMB Securities Limited do not hold, and are not required to hold an Australian financial services licence. CIMB Securities (Singapore) Pte. Ltd. and CIMB Securities Limited rely on “passporting” exemptions for entities appropriately licensed by the Monetary Authority of Singapore (under ASIC Class Order 03/1102) and the Securities and Futures Commission in Hong Kong (under ASIC Class Order 03/1103).

Canada: This research report has not been prepared in accordance with the disclosure requirements of Dealer Member Rule 3400 – Research Restrictions and Disclosure Requirements of the Investment Industry Regulatory Organization of Canada. For any research report distributed by CIBC, further disclosures related to CIBC conflicts of interest can be found at https://researchcentral.cibcwm.com .

China: For the purpose of this report, the People’s Republic of China (“PRC”) does not include the Hong Kong Special Administrative Region, the Macau Special Administrative Region or Taiwan. The distributor of this report has not been approved or licensed by the China Securities Regulatory Commission or any other relevant regulatory authority or governmental agency in the PRC. This report contains only marketing information. The distribution of this report is not an offer to buy or sell to any person within or outside PRC or a solicitation to any person within or outside of PRC to buy or sell any instruments described herein. This report is being issued outside the PRC to a limited number of institutional investors and may not be provided to any person other than the original recipient and may not be reproduced or used for any other purpose.

France: Only qualified investors within the meaning of French law shall have access to this report. This report shall not be considered as an offer to subscribe to, or used in connection with, any offer for subscription or sale or marketing or direct or indirect distribution of financial instruments and it is not intended as a solicitation for the purchase of any financial instrument.

Germany: This report is only directed at persons who are professional investors as defined in sec 31a(2) of the German Securities Trading Act (WpHG). This publication constitutes research of a non-binding nature on the market situation and the investment instruments cited here at the time of the publication of the information.

The current prices/yields in this issue are based upon closing prices from Bloomberg as of the day preceding publication. Please note that neither the German Federal Financial Supervisory Agency (BaFin), nor any other supervisory authority exercises any control over the content of this report.

Hong Kong: This report is issued and distributed in Hong Kong by CIMB Securities Limited (“CHK”) which is licensed in Hong Kong by the Securities and Futures Commission for Type 1 (dealing in securities), Type 4 (advising on securities) and Type 6 (advising on corporate finance) activities. Any investors wishing to purchase or otherwise deal in the securities covered in this report should contact the Head of Sales at CIMB Securities Limited. The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Conduct Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CHK has no obligation to update its opinion or the information in this research report.

This publication is strictly confidential and is for private circulation only to clients of CHK.

CIMB Securities Limited does not make a market on the securities mentioned in the report.

India: This report is issued and distributed in India by CIMB Securities (India) Private Limited (”CIMB India") which is registered with SEBI as a stock-broker under the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992, the Securities and Exchange Board of India (Research Analyst) Regulations, 2014 (SEBI Registration Number INH000000669) and in accordance with the provisions of Regulation 4 (g) of the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013, CIMB India is not required to seek registration with SEBI as an Investment Adviser.

The research analysts, strategists or economists principally responsible for the preparation of this research report are segregated from equity stock broking and merchant banking of CIMB India and they have received compensation based upon various factors, including quality, accuracy


26

and value of research, firm profitability or revenues, client feedback and competitive factors. Research analysts', strategists' or economists' compensation is not linked to investment banking or capital markets transactions performed or proposed to be performed by CIMB India or its affiliates.”

Indonesia: This report is issued and distributed by PT CIMB Securities Indonesia (“CIMBI”). The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Conduct Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CIMBI has no obligation to update its opinion or the information in this research report. Neither this report nor any copy hereof may be distributed in Indonesia or to any Indonesian citizens wherever they are domiciled or to Indonesian residents except in compliance with applicable Indonesian capital market laws and regulations.

This research report is not an offer of securities in Indonesia. The securities referred to in this research report have not been registered with the Financial Services Authority (Otoritas Jasa Keuangan) pursuant to relevant capital market laws and regulations, and may not be offered or sold within the territory of the Republic of Indonesia or to Indonesian citizens through a public offering or in circumstances which constitute an offer within the meaning of the Indonesian capital market law and regulations.

Ireland: CIMB is not an investment firm authorised in the Republic of Ireland and no part of this document should be construed as CIMB acting as, or otherwise claiming or representing to be, an investment firm authorised in the Republic of Ireland.

Malaysia: This report is issued and distributed by CIMB Investment Bank Berhad (“CIMB”) solely for the benefit of and for the exclusive use of our clients. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Conduct Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CIMB has no obligation to update, revise or reaffirm its opinion or the information in this research reports after the date of this report.

New Zealand: In New Zealand, this report is for distribution only to persons who are wholesale clients pursuant to section 5C of the Financial Advisers Act 2008.

Singapore: This report is issued and distributed by CIMB Research Pte Ltd (“CIMBR”). CIMBR is a financial adviser licensed under the Financial Advisers Act, Cap 110 (“FAA”) for advising on investment products, by issuing or promulgating research analyses or research reports, whether in electronic, print or other form. Accordingly CIMBR is a subject to the applicable rules under the FAA unless it is able to avail itself to any prescribed exemptions.

Recipients of this report are to contact CIMB Research Pte Ltd, 50 Raffles Place, #19-00 Singapore Land Tower, Singapore in respect of any matters arising from, or in connection with this report. CIMBR has no obligation to update its opinion or the information in this research report. This publication is strictly confidential and is for private circulation only. If you have not been sent this report by CIMBR directly, you may not rely, use or disclose to anyone else this report or its contents.

If the recipient of this research report is not an accredited investor, expert investor or institutional investor, CIMBR accepts legal responsibility for the contents of the report without any disclaimer limiting or otherwise curtailing such legal responsibility. If the recipient is an accredited investor, expert investor or institutional investor, the recipient is deemed to acknowledge that CIMBR is exempt from certain requirements under the FAA and its attendant regulations, and as such, is exempt from complying with the following :

(a) Section 25 of the FAA (obligation to disclose product information);

(b) Section 27 (duty not to make recommendation with respect to any investment product without having a reasonable basis where you may be reasonably expected to rely on the recommendation) of the FAA;

(c) MAS Notice on Information to Clients and Product Information Disclosure [Notice No. FAA-N03];

(d) MAS Notice on Recommendation on Investment Products [Notice No. FAA-N16];

(e) Section 36 (obligation on disclosure of interest in securities), and

(f) any other laws, regulations, notices, directive, guidelines, circulars and practice notes which are relates to the above, to the extent permitted by applicable laws, as may be amended from time to time, and any other laws, regulations, notices, directive, guidelines, circulars, and practice notes as we may notify you from time to time. In addition, the recipient who is an accredited investor, expert investor or institutional investor acknowledges that a CIMBR is exempt from Section 27 of the FAA, the recipient will also not be able to file a civil claim against CIMBR for any loss or damage arising from the recipient’s reliance on any recommendation made by CIMBR which would otherwise be a right that is available to the recipient under Section 27 of the FAA, the recipient will also not be able to file a civil claim against CIMBR for any loss or damage arising from the recipient’s reliance on any recommendation made by CIMBR which would otherwise be a right that is available to the recipient under Section 27 of the FAA.

CIMB Research Pte Ltd ("CIMBR"), its affiliates and related companies, their directors, associates, connected parties and/or employees may own or have positions in securities of the company(ies) covered in this research report or any securities related thereto and may from time to time add to or dispose of, or may be materially interested in, any such securities. Further, CIMBR, its affiliates and its related companies do and seek to do business with the company(ies) covered in this research report and may from time to time act as market maker or have assumed an underwriting commitment in securities of such company(ies), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform significant investment banking, advisory, underwriting or placement services for or relating to such company(ies) as well as solicit such investment, advisory or other services from any entity mentioned in this report.

As of October 17, 2016, CIMBR does not have a proprietary position in the recommended securities in this report.

CIMB Securities Singapore Pte Ltd and/or CIMB Bank does not make a market on the securities mentioned in the report.

South Korea: This report is issued and distributed in South Korea by CIMB Securities Limited, Korea Branch (“CIMB Korea”) which is licensed as a cash equity broker, and regulated by the Financial Services Commission and Financial Supervisory Service of Korea. In South Korea, this report is for distribution only to professional investors under Article 9(5) of the Financial Investment Services and Capital Market Act of Korea (“FSCMA”).

Spain: This document is a research report and it is addressed to institutional investors only. The research report is of a general nature and not personalised and does not constitute investment advice so, as the case may be, the recipient must seek proper advice before adopting any investment decision. This document does not constitute a public offering of securities.


27

CIMB is not registered with the Spanish Comision Nacional del Mercado de Valores to provide investment services.

Sweden: This report contains only marketing information and has not been approved by the Swedish Financial Supervisory Authority. The distribution of this report is not an offer to sell to any person in Sweden or a solicitation to any person in Sweden to buy any instruments described herein and may not be forwarded to the public in Sweden.

Switzerland: This report has not been prepared in accordance with the recognized self-regulatory minimal standards for research reports of banks issued by the Swiss Bankers’ Association (Directives on the Independence of Financial Research).

Taiwan: This research report is not an offer or marketing of foreign securities in Taiwan. The securities as referred to in this research report have not been and will not be registered with the Financial Supervisory Commission of the Republic of China pursuant to relevant securities laws and regulations and may not be offered or sold within the Republic of China through a public offering or in circumstances which constitutes an offer or a placement within the meaning of the Securities and Exchange Law of the Republic of China that requires a registration or approval of the Financial Supervisory Commission of the Republic of China.

Thailand: This report is issued and distributed by CIMB Securities (Thailand) Company Limited (“CIMBS”) based upon sources believed to be reliable (but their accuracy, completeness or correctness is not guaranteed). The statements or expressions of opinion herein were arrived at after due and careful consideration for use as information for investment. Such opinions are subject to change without notice and CIMBS has no obligation to update its opinion or the information in this research report.

If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Conduct Authority apply to a recipient, our obligations owed to such recipient are unaffected.

CIMB Securities (Thailand) Co., Ltd. may act or acts as Market Maker, and issuer and offerer of Derivative Warrants and Structured Note which may have the following securities as its underlying securities. Investors should carefully read and study the details of the derivative warrants in the prospectus before making investment decisions.

AAV, ADVANC, AMATA, ANAN, AOT, AP, BA, BANPU, BBL, BCH, BCP, BDMS, BEAUTY, BEC, BEM, BH, BJCHI, BLA, BLAND, BTS, CBG, CENTEL, CHG, CK, CKP, COM7, CPALL, CPF, CPN, DELTA, DTAC, EGCO, EPG, ERW, GL, GLOBAL, GLOW, GPSC, GUNKUL, HANA, HMPRO, ICHI, IFEC, INTUCH, IRPC, ITD, IVL, JWD, KBANK, KCE, KKP, KTB, KTC, LH, LHBANK, LPN, MAJOR, MINT, MTLS, PLANB, PS, PTG, PTT, PTTEP, PTTGC, QH, ROBINS, RS, S, SAMART, SAWAD, SCB, SCC, SGP, SIRI, SPALI, SPCG, STEC, STPI, SVI, TASCO, TCAP, THAI, THCOM, TISCO, TMB, TOP, TPIPL, TRC, TRUE, TTA, TTCL, TTW, TU, TVO, UNIQ, VGI, VNG, WHA, WORK.

Corporate Governance Report:

The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the Market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information.

The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey result may be changed after that date. CIMBS does not confirm nor certify the accuracy of such survey result.

Score Range: 90 - 100 80 - 89 70 - 79 Below 70 or No Survey Result

Description: Excellent Very Good Good N/A

United Arab Emirates: The distributor of this report has not been approved or licensed by the UAE Central Bank or any other relevant licensing authorities or governmental agencies in the United Arab Emirates. This report is strictly private and confidential and has not been reviewed by, deposited or registered with UAE Central Bank or any other licensing authority or governmental agencies in the United Arab Emirates. This report is being issued outside the United Arab Emirates to a limited number of institutional investors and must not be provided to any person other than the original recipient and may not be reproduced or used for any other purpose. Further, the information contained in this report is not intended to lead to the sale of investments under any subscription agreement or the conclusion of any other contract of whatsoever nature within the territory of the United Arab Emirates.

United Kingdom: In the United Kingdom and European Economic Area, this report is being disseminated by CIMB Securities (UK) Limited (“CIMB UK”). CIMB UK is authorized and regulated by the Financial Conduct Authority and its registered office is at 27 Knightsbridge, London, SW1X7YB. Unless specified to the contrary, this report has been issued and approved for distribution in the U.K. and the EEA by CIMB UK. Investment research issued by CIMB UK has been prepared in accordance with CIMB Group’s policies for managing conflicts of interest arising as a result of publication and distribution of investment research. This report is for distribution only to, and is solely directed at, selected persons on the basis that those persons: (a) are eligible counterparties and professional clients of CIMB UK; (b) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the “Order”), (c) fall within Article 49(2)(a) to (d) (“high net worth companies, unincorporated associations etc”) of the Order; (d) are outside the United Kingdom subject to relevant regulation in each jurisdiction, or (e) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with any investments to which this report relates may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as “relevant persons”). This report is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this report relates is available only to relevant persons and will be engaged in only with relevant persons.

Where this report is labelled as non-independent, it does not provide an impartial or objective assessment of the subject matter and does not constitute independent “investment research” under the applicable rules of the Financial Conduct Authority in the UK. Consequently, any such non-independent report will not have been prepared in accordance with legal requirements designed to promote the independence of investment research and will not subject to any prohibition on dealing ahead of the dissemination of investment research. Any such non-independent report must be considered as a marketing communication.

United States: This research report is distributed in the United States of America by CIMB Securities (USA) Inc, a U.S. registered broker-dealer and a related company of CIMB Research Pte Ltd, CIMB Investment Bank Berhad, PT CIMB Securities Indonesia, CIMB Securities (Thailand)


28

Co. Ltd, CIMB Securities Limited, CIMB Securities (India) Private Limited, and is distributed solely to persons who qualify as “U.S. Institutional Investors” as defined in Rule 15a-6 under the Securities and Exchange Act of 1934. This communication is only for Institutional Investors whose ordinary business activities involve investing in shares, bonds, and associated securities and/or derivative securities and who have professional experience in such investments. Any person who is not a U.S. Institutional Investor or Major Institutional Investor must not rely on this communication. The delivery of this research report to any person in the United States of America is not a recommendation to effect any transactions in the securities discussed herein, or an endorsement of any opinion expressed herein. CIMB Securities (USA) Inc, is a FINRA/SIPC member and takes responsibility for the content of this report. For further information or to place an order in any of the above-mentioned securities please contact a registered representative of CIMB Securities (USA) Inc.

CIMB Securities (USA) Inc does not make a market on the securities mentioned in the report.

Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution to professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

Spitzer Chart for stock being researched ( 2 year data )

MRCB-Quill REIT (MQREIT MK)

Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (Thai IOD) in 2015, Anti-Corruption Progress Indicator 2015.

AAV – Very Good, 3B, ADVANC – Excellent, 3A, AEONTS – Good, 1, AMATA – Very Good, 2, ANAN – Very Good, 3A, AOT – Very Good, 2, AP - Good, 3A, ASK – Very Good, 3B, ASP – Very Good, 4, BANPU – Very Good, 4, BAY – Very Good, 4, BBL – Very Good, 4, BCH – not available, no progress, BCP - Excellent, 5, BEM – not available, no progress, BDMS – Very Good, 3B, BEAUTY – Good, 2, BEC - Good, 3B, BH - Good, 2, BIGC - Excellent, 3A, BJC – Good, 1, BLA – Very Good, 4, 1, BTS - Excellent, 3A, CBG – Good, 1, CCET – not available, 1, CENTEL – Very Good, 3A, CHG – Good, 3B, CK – Excellent, 3B, COL – Very Good, 3A, CPALL – Good, 3A, CPF – Very Good, 3A, CPN - Excellent, 5, DELTA - Very Good, 3A, DEMCO – Very Good, 3A, DTAC – Excellent, 3A, EA – not available, 3A, ECL – Good, 4, EGCO - Excellent, 4, EPG – not available, 3B, GFPT - Very Good, 3A, GLOBAL – Very Good, 2, GLOW - Good, 3A, GPSC – not available, 3B, GRAMMY - Excellent, 3B, GUNKUL – Very Good, 1, HANA - Excellent, 4, HMPRO - Excellent, 3A, ICHI – Very Good, 3A, INTUCH - Excellent, 4, ITD – Good, 1, IVL - Excellent, 4, JAS – not available, 3A, JASIF – not available, no progress, JUBILE – Good, 3A, KAMART – not available, no progress, KBANK - Excellent, 4, KCE - Excellent, 4, KGI – Good, 4, KKP – Excellent, 4, KSL – Very Good, 2, KTB - Excellent, 4, KTC – Very Good, 3A, LH - Very Good, 3B, LPN – Excellent, 3A, M - Good, 2, MAJOR - Good, 1, MAKRO – Good, 3A, MALEE – not available, 2, MBKET – Good, 2, MC – Very Good, 3A, MCOT – Excellent, 3A, MEGA – Very Good, 2, MINT - Excellent, 3A, MTLS – Good, 2, NYT – Good, no progress, OISHI – Very Good, 3B, PLANB – Good, 3B, PS – Excellent, 3A, PSL - Excellent, 4, PTT - Excellent, 5, PTTEP - Excellent, 4, PTTGC - Excellent, 5, QH – Very Good, 2, RATCH – Excellent, 3A, ROBINS – Excellent, 3A, RS – Very Good, 1, SAMART - Excellent, 3B, SAPPE - Good, 3B, SAT – Excellent, 5, SAWAD – Good, 1, SC – Excellent, 3B, SCB - Excellent, 4, SCBLIF – not available, no progress, SCC – Excellent, 5, SCN – Good, 1, SCCC - Good, 3A, SIM - Excellent, 3B, SIRI - Good, 1, SPALI - Excellent, 3A, SPRC – not available, no progress, STA – Very Good, 1, STEC – Very Good, 3B, SVI – Very Good, 3A, TASCO – Very Good, 3A, TCAP – Very Good, 4, THAI – Very Good, 3A, THANI – Very Good, 5, THCOM – Excellent, 4, THRE – Very Good, 3A, THREL – Very Good, 3A, TICON – Very Good, 3A, TISCO - Excellent, 4, TK – Very Good, 3B, TKN – not available, no progress, TMB - Excellent, 4, TPCH – Good, 3B, TOP - Excellent, 5, TRUE – Very Good, 2, TTW – Very Good, 2, TU – Very Good, 3A, UNIQ – not available, 2, VGI – Excellent, 3A, WHA – Good, 3A, WORK – not available, no progress.

Comprises level 1 to 5 as follows:

Level 1: Committed

Level 2: Declared

Level 3: Established (3A: Established by Declaration of Intent, 3B: Established by Internal Commitment and Policy)

Level 4: Certified

Level 5: Extended.

Rating Distribution (%) Investment Banking clients (%)

Add 57.7% 7.5%

Hold 31.7% 2.8%

Reduce 9.8% 0.6%

Distribution of stock ratings and investment banking clients for quarter ended on 30 September 2016

1598 companies under coverage for quarter ended on 30 September 2016

0.900

0.950

1.000

1.050

1.100

1.150

1.200

1.250

1.300

1.350

1.400

Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16

Price Close


29

CIMB Recommendation Framework

Stock Ratings Definition:

Add The stock’s total return is expected to exceed 10% over the next 12 months.

Hold The stock’s total return is expected to be between 0% and positive 10% over the next 12 months.

Reduce The stock’s total return is expected to fall below 0% or more over the next 12 months.

The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward net dividend yields of the stock. Stock price targets have an investment horizon of 12 months.

Sector Ratings Definition:

Overweight An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation.

Neutral A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation.

Underweight An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation.

Country Ratings Definition:

Overweight An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark.

Neutral A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark.

Underweight An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark.

Company Note - CIMB Note IMPORTANT ... While the acquisition of Menara Shell is likely DPU-neutral...

Documents

Transcript of Company Note - CIMB Note IMPORTANT ... While the acquisition of Menara Shell is likely DPU-neutral...