KLCCSS’s 1Q18 core PATAMI of RM180.7m (-3.9% QoQ, +2.2% YoY) was broadly in line with both ours and consensus expectations. The improvement was driven by improvement in all business segments. However, this partially offset by lower management fees. We lower our FY18-20 earnings by 8-6% followed by a decrease in DPU FY18-20 by 3-1% as we factor in the distribution adjustment and latest annual report figures. We maintain HOLD call with lower TP of RM7.53 (from RM7.76) based on targeted yield of 5.0%.

Within expectations. 1Q18 gross revenue of RM345.1m (-2.0% QoQ, +2.5% YoY) translated into core PATAMI of RM180.7m (-3.9% QoQ, +2.2% YoY). The results were broadly in line with both ours and consensus expectations, accounting for 23.4% and 24.4%, respectively.

Dividend. Declared 1st interim dividend of 8.70 sen (1Q17: 8.60 sen), going on ex on the 30 th May 2018.

QoQ. Total gross revenue reduced by 2.0% to RM345.1m (from RM352.1m in 4Q17), followed by a decrease of 3.9% in core PATAMI at RM180.7m. The decline was essentially resulted from the lower contribution from the hotel operation and lower interest income. The hotel segment was affected by the lower proceeds from banqueting, as compared to 4Q17 which customarily records higher F&B revenue due to year end celebrations.

YoY. RM345.1m of gross revenue in 1Q18 was a 2.5% improvement from RM336.7m in 1Q17, which followed by an increase in core PATAMI by 2.2% at RM180.7m. This was supported by the growth in all business segments; (1) office segment contribution was boosted by the full occupancy of Menara ExxonMobil (compared to 60% occupancy in 1Q17) as well as lower finance costs being repayment of borrowings that was made back in April 2017, (2) retail segment improved on the back of high er rental rates and (3) stronger hotel segment performance was driven by higher contributions from room revenue thanks to newly refurbished rooms coupled with improved F&B revenue. The overall increment was slightly mitigated by a decrease in management services which was affected by the changes in the timing of the payment of manpower costs.

Outlook. Management anticipates stable performance mainly on the back of its long term office tenancy agreements. Nevertheless, we do not expect the office sector oversupply issue to be resolved in the near future as there are significant incoming supplies of new office spaces over the next 2-3 years. Going forward, we do expect improved contribution from the hotel segment, as refurbishment of the rooms are expected to complete by the end of FY18.

Forecast. Although results were broadly in line, we take this opportunity to adjust our FY18-20 earnings marginally lower by 8%, 7% and 6% respectively to account for (1) updated figures following the release of annual report and (2) distribution adjustment for the accrual rental income pertaining to the adoption of MFRS standards. As a result, our DPS forecast is also reduced by 3%, 2% and 1% for FY18-20.

Maintain HOLD, TP: RM7.53. While we maintain our HOLD call, our TP is reduced from RM7.76 to RM7.53 following the lower DPS projection. Our TP is based on targeted yield of 5.0% which is derived from 2 years historical average yield spread of KLCCSS and 10 year MGS.

Source: Hong Leong Investment Bank Research - 17 May 2018