Results

9MFY14  core net profit  of RM506.0m (+11.9% yoy)  came in within  expectations,  accounting  for  75.9%  and  76.4%  of HLIB and  consensus  full year  estimates, respectively.

Deviations

Largely in-line.

Dividends

Declared  a  dividend  of  8.19  sen  per  share  (3QFY13:  8.23 sen),  accounting for 74.8% and 75.4%  HLIB and consensus full year  DPU projections, respectively.

Maintaining  target  payout ratio of 95%  for  FY14.

Highlights 

Office segment remains  the main contributor...  Benefited  from  implementation  of  triple  net  lease  of Menara  Dayabumi  which  has  completed  refurbishment Phase  1  and  Phase  2.   Soil  investigation  for  Phase  3  of redevelopment of City Point Podium   has been completed. Demolishme nt  works  will  commence  in  2015  and  are slated to complete in 2019.   We strongly believe the office segment will continue to be the  main  contributor  of  stable  revenue  stream  given  its 100%  occupancy  rates,  premium  grade  “A”  and  ic onic properties as well as long -term lease with majority of triple net lease.

Stable and steady contribution  from retail segment...  3Q14  revenue  from  retail  increased  +5.5%  yoy  driven  by positive rental reversion and resilient trade mix with steady tenant sales growth. We  opined  that  notwithstanding  subdued  consumer sentiment  moving  forward,  Suria  KLCC  will  continue  to record positive rental reversion. Currently, occupancy rate remained  at  98%  and  recorded  more  than  40m  footfall annually.

Challenging environment for hotel segment...  The  management  is  striving  to  keep  Mandarin  Oriental competitive  given  the  inc reased  competition  and aggressive pricing by competing luxury hotels at the heart of city centre.   During  the  quarter,  ballroom  renovation  has  been completed which result ed  in  higher contribution  from  food and  beverage  segment.  Ongoing  refurbis hment  is  still  in progress  and occupancy rate remains at 65%.

Risks

• Potential holding company discount for the stapled security .

Rating

HOLD, TP:  RM6.49

• Positives:  (1)  High  occupancy  rates  (>90%),  consistently strong  human  traffic  and  desirable  tenant  profile  due  to prestigious and desirable KLCC address; and (2) Stability of rental yield and scope for  capital appreciation.
• Negatives:  Lack of near-term  catalyst.

Valuation

• We maintain  TP of  RM6.48  and  HOLD  recommendation  on the stock.
• Targeted  yield remains at 5.3% based on historical average yield spread  of KLCCSS  and 7-year MGS.

Source: Hong Leong Investment Bank Research - 10 Nov 2014