Highlights

• We attended the fi rst corporate day for 2015 and came back with neutral feeling as there is no major surprise, as expected. It was hosted by En. Annuar Marzuki, CFO/CIO and the question and answer session was addressed by Datuk Hashim Wahir, Group CEO.

• Office segment which contributes 44% revenue to the group (41% from KLCC REIT) continues to report stable income stream. Despite the headwinds in office supply for Klang Valley, occupancy rate maintained at 100% for all offices within the port folio. The group also secured triple net lease agreement with Petronas for Menara Dayabumi effective 1 January 2014, which saw RM13.3m savings in operating expenses after its implementation.

• Suria KLCC and Retail Podium at Menara 3 which make up the retail segment also continue to record strong revenue growth (+9% yoy). Despite 12% rental reversion in 2014, occupancy for the mall remains high at 98% and managed to attract more than 45m footfall.

• We gathered that the average base rent for retail sector in 2014 was RM28 per sq ft / month and on average, 30% of the NLA will be due for renewal every year. We reiterate our view that GST implementation will not significantly affect the retail segment, particularly prime retail mall.

• Mandarin Oriental (MO) which has break the record of highest revenue in its 16 years history registered 9% yoy growth in revenue supported by 23% growth in F&B segment mainly from newly renovated ballroom. Occupancy rate for 2014 stood at 63% and it continues to lead the RevPAR for luxurious hotel segment in the city centre.

• MO benefited the most from MICE (meetings, incentives, conference and exhibitions) which is still undergoing renovation in stages to refresh and strengthen its position as a premier offering in the KLCC Precinct. We understand that the bookings for convention cent re this year will not be any lesser than previous year and we view this as catalyst for MO to continue deliver strong earnings for the group.

Risks

• Potential holding company discount for the stapled security.
• High portfolio concentration on office segment.
• Competition from upcoming new iconic office building within Kuala Lumpur Central Business District.

Forecasts

• Unchanged.

Rating

• 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(s).

Valuation

Maintain HOLD recommendation on the stock with unchanged TP of RM6.90. Targeted yield remain at 5.2% based on historical average yield spread between KLCCSS and 7-year MGS.

Source: Hong Leong Investment Bank Research - 29 Jan 2015