Highlights

• We attended KLCCSS’s analyst briefing and walked away feeling neutral. Key highlights as below:
• Office segment: Occupancy for office port folio was back to 100% after securing lease agreement with Petronas to occupy remaining 40% leased area at Menara ExxonMobil for a tenure of 18 years from April 2017. Outlook for office market remains subdued in 2H17 due to weak occupier demand and oversupply issue. We do not expect the oversupply issue to be resolved in the short term due to significant incoming supply of new office spaces over the next 2-3 years.
• Retail segment: Performance from Suria KLCC is encouraging as we understand that rental reversion rate is at a positive range of 3-5%. Moving annual turnover (MAT) tenant sales grew 3.5% yoy while the 4.5% increase in YTD customer count further shows the resilience of the mall. Moreover, expected completion of tenant remixing exercise in Suria KLCC next year may further enhance the performance of the mall.
• Hotel segment: Contribution from Mandarin Oriental Kuala Lumpur (MOKL) has improved due to increased occupancy rate coupled with improved room and F&B contributions. Moreover, first phase of guestroom renovation in the hotel has been completed. This adds 148 rooms (23% of total room) comprising Club rooms and Suites which command higher room rate into saleable inventory. Second phase of guestroom renovation has been commenced and is expected to complete in 2018. Going forward we expect improved contribution from the hotel segment due to completion of renovation works and growth in tourist arrivals.
• Gearing: Gross gearing ratio has decreased to 17.6% (from 20%) with average cost of debt slightly increased to 4.55% (from 4.49%). 84% of the borrowings are on fixed rate and hence is well protected under potential rising yield environment.

Risks

• Prolonged weak hotel performance.
• Competition from upcoming new iconic office building and hotels within Kuala Lumpur Central Business District.

Forecasts

• Maintained.

Rating

HOLD ↔ , TP: RM7.66↔

• Maintain HOLD as we deem the yield at this level is less attractive vis-a-vis current MGS yield. However, we like its Syariah-compliant status on the back of super prime assets and stable income while gearing is below industry average.

Valuation

• Maintain HOLD with unchanged TP of RM7.66 based on FY18 DPU with unchanged targeted yield of 5.0% (historical average yield spread of KLCCSS and 10-year MGS).

Source: Hong Leong Investment Bank Research - 17 Aug 2017