KLCC Stapled Securities - Expect Weaker Hotel Operation Going Forward

Date: 06/08/2020

Source  :  HLG
Stock  :  KLCC       Price Target  :  8.05      |      Price Call  :  HOLD
        Last Price  :  7.60      |      Upside/Downside  :  +0.45 (5.92%)

KLCCSS’s 1H20 core net profit of RM317.3m (-12.9%) was above ours and consensus expectations as the negative impact from MCO/CMCO was less severe than we initially thought to be. Overall, the performance was still affected by full brunt impact of MCO/CMCO/RMCO, although its office segment remained stable. We maintain our forecast pending the analysts’ briefing later today. We also maintain our HOLD rating with an unchanged of TP: RM8.05. While we like KLCCCS given its resilient office segment, prime location retail and Shariah compliant scarcity amongst REITs, we remain cautious on a likely slow recovery for the retail and hotel segment due to Covid-19

Above expectations. 2Q20 core PATAMI of RM140.5m (-20.6% QoQ, -22.1% YoY) brought 1H20 sum to RM317.3m (-12.9%). At 53% and 46% of ours and consensus full year forecast, we deem this to be above expectations as 2H will likely be stronger than 1H which bore the brunt of the MCO impact. The positive deviation was due to the negative impact from MCO/CMCO in 2Q being less severe than we initially thought it to be.

Dividend. Declared 2 nd interim dividend of 7.50 sen per share (KLCC REIT: 6.09 sen, KLCC Property: 1.41 sen) going on ex on the 24 st Aug 2020 (2Q19: 8.80 sen).

QoQ/YoY. Revenue dipped to RM267.2m (-24.6% QoQ, -23.9% YoY) mainly due to (i) poor performance in retail segment (-44.1% QoQ, -41.4% YoY) from the provision of rental assistance to the tenants in response to the restricted movement, and (ii) low performance in hotel operations (-87.7% QoQ, -91.7% YoY) as its hotel, Mandarin Oriental (MO), was severely impacted by the Covid-19 from cancellation of events and low occupancy rate. Office segment remained stable (-0.6% QoQ, -0.4% YoY), backed by their long-term triple net lease agreement. PBT dropped to RM163.8m (- 29.5% QoQ, -30.0% YoY) in tandem with lower revenue, which in turn, brought down core PATAMI to RM 140.5m (-20.6% QoQ, -22.1% YoY).

YTD. Top-line decreased by 11.7% due to low performance in retail (-19.0%) and hotel segment (-62.6%) from the full brunt of MCO/CMCO/RMCO impact. Following lower revenue, core PATAMI dropped by 12.9% to RM317.3m.

Outlook. We remain cautious on KLCCSS’ near-term outlook, especially seeing that its hotel segment has posted wider losses in 2Q and its turnaround may not be anytime soon due to the bleak hotel outlook and absence of tourists as borders remained closed. Although all tenants of Suria KLCC have since reconvened business and footfall count has improved in June 2020 as the MCO eased up gradually, the retail industry is facing a challenging time ahead, amid potential changes in consumer behaviour and sentiment upon the uplift of restricted movement, hence suggesting a slow recovery in 2H. However, we believe its office segment will remain stable on the back of long-term tenancies and their triple net lease agreement that forms a healthy cash flow foundation.

Forecast. Maintain forecast pending analysts’ briefing later today.

Maintain HOLD, with an unchanged of TP: RM8.05 based on FY21 forward DPS on targeted yield of 4.3%, derived from 2 years historical average yield spread of KLCCSS and MAGY10YR. While we like KLCCCS given its resilient office segment, prime location retail and Shariah compliant scarcity amongst REITs, we remain cautious on a likely slow recovery for the retail and hotel segment due to Covid-19.

Source: Hong Leong Investment Bank Research - 6 Aug 2020

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