Stable outlook. We attended K LCCSS’s 6MFY16 results briefing yesterday with stable view on the outlook for 2H16 and 2017 amid improvement from retail segment while hotel operations remain challenging.
A recap on 6MFY16 results. Gross revenue grew 2% yoy to RM669.3m while bottomline grew 0.6% to RM360.6m; declared dividend of 8.60 sen (+3.1%) with higher payout.
Key takeaway from the briefing.
Office Segment: Steady
Phase 2 extension to create extra 30k sqft office space at Menara Dayabumi is completing and will be taken up by existing tenants from Q3FY16 onwards.
The long-term tenancy renewal for Menara ExxonMobil is secured in principal, albeit circa 30% of the total NLA is likely to be given up; meanwhile management is working on securing single tenant to assume the vacant space.
Retail Segment: More Optimism
Average footfall maintained at >45m but occupancy rate dropped slightly to 96% as they reposition tenants at the luxury precinct on level 1.
MAT-tenant sales grew 8% yoy on a low base and improved sentiment; while rental reversion was at 4-7%.
Hotel Segment: Challenging
Hotel operations still posted a loss impacted by one-off RM2.5m write-off of furniture & fittings and higher operating cost, despite improvement in occupancy rate +1% yoy and average room rate +9% yoy.
However, it was down qoq with lacklustre F&B performance due to closure of Sultan’s Lounge & Casbah and fewer MICE events.
The renovation for guestrooms will commence in Q3FY16 for 2 years with capex of RM100m while the demand for hotels remains challenging.
Updates on City Point Podium. Substructure and piling works have commenced and they are in the midst of inviting tender on construction works for the mixed development with GDV of RM1bn, which is expected to complete in 2019.
Risks
Potential holding company discount for the stapled security.
Competition from upcoming new iconic office building.
Forecasts
We factor in lower occupancy rate and revenue for hotel segment and account for potential loss of income from Menara ExxonMobil, resulting in marginal decrease in PAT.
Rating
BUY, TP: RM8.35
Maintain BUY recommendation as we see limited downside given the monetary easing bias and low yield environment.
Positives: (1) Consistent high occupancy rates, strong human traffic and desirable tenant profile; and (2) Stability of rental yield and scope for capital appreciation.
Negatives: Lack of near-term catalyst(s).
Valuation
TP is lowered to RM8.35 based on FY17 forecasted DPU. Targeted yield is maintained at 4.6% based on historical average yield spread of KLCCSS and 10-year MGS.
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