Highlights

• We attended KLCCSS’s analyst briefing and walked away feeling slightly positive. Key highlights as below:
• Office segment: Occupancy for office port folio remained at 100% upon securing new long term leases for Menara ExxonMobil. Furthermore, its “Workplace For Tomorrow” initiative at all office buildings that caters to personalized needs would aid in promoting productivity and building efficiency. Outlook for the office market remains subdued in FY18 due to weaker 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 asset/service enhancement initiatives are being carried out to enhance customer shopping experience. Moving annual turnover (MAT) tenant sales grew 5.6% YoY further shows the resilience of the mall. Moreover, the ongoing tenant remixing is expected to contribute to higher rental rates from new tenants, further appreciates the performance of the mall.
• Hotel segment: Stronger hotel performance was driven by increased occupancy rate coupled with improved room and F&B contributions. Moreover, first phase of guestroom renovation in the hotel has been completed (157 Club rooms and Suites) which improved demand from banqueting and F&B contribution. Second phase guestroom renovation is ongoing and is expected to be completed in FY18. 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 decreased slightly to 17.2% (from 17.6%) with average cost of debt maintained at 4.55%. Moreover, 84% of the borrowings are on fixed rate and hence is well protected under possible rising yield environment.

Risks

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

Forecasts

• Unchanged.

Rating

HOLD ↔, TP: RM7.76↔

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

Valuation

• TP unchanged at RM7.76 and maintained HOLD with unchanged targeted yield of 5.0% (historical average yield spread of KLCCSS and 10-year MGS).

Source: Hong Leong Investment Bank Research - 26 Jan 2018