KLCCSS’ 1H18 core PATAMI of RM359.8m (+1.4% YoY) was in line with both ours and consensus expectations. Declared dividend of 8.70 sen per share. The improvement was contributed by growth in all business segments. However, this was partially offset by increased in operating expenses. Going forward, we expect stable performance for office segment and better contribution from hotel segment as the second phase room refurbishment is expected to complete by 3Q18. We retain our forecast and maintain HOLD call with unchanged TP of RM7.88 based on targeted yield of 5.0%.

Within expectations. 1H18 revenue of RM690.1m (+2.4% YoY) translated into core PATAMI of RM359.8m (+1.4% YoY). The results were in line with both ours and consensus expectations, accounting for 50.6% and 48.9%, respectively.

Dividend. Declared 2nd interim dividend of 8.70 sen per share (KLCC REIT: 5.65 sen, KLCC Property: 3.05 sen) going ex on the 29 August 2018 (2Q17: 8.60 sen).

QoQ. Revenue remained stable at RM345.1m, followed by a decrease of 0.8% in core PATAMI at RM179.1m. The decline was essentially resulted from the lower contribution from the hotel segment due to lower occupancy during festive month and postponement of banqueting events due to general election.

YoY. RM345.1m of revenue in 2Q18 was a 2.2% improvement from RM337.5m in 2Q17, which followed by an increase in core PATAMI by 0.7% to RM179.1m. This was supported by the growth in retail segment (higher rental rates), hotel segment (with newly refurbished rooms) and management services segments (new contracts received), while office segment remained stable. However, bottom line growth was lower as the overall top line increment was slightly offset by the increase in operating expenses.

YTD. Revenue for 1H18 increased by 2.4% to RM690.1m. Likewise core PATAMI of RM359.8m showed improvement of 1.4%. Essentially, the increment was contributed by revenue growth in all segments: (1) office segment increased 1.0% reflecting the 100% achieved occupancy in Menara ExxonMobil; (2) retail segment improved 1.2% on the back of higher rental rates and occupancy; (3) stronger hotel segment by 7.2% driven by higher contribution from room revenue on the back of newly refurbished rooms; (4) management services increased due to new contracts under facilities management services for the Workplace for Tomorrow project and one-off facility management works in Kertih, Terengganu. The overall increment was slightly offset by higher depreciation and interest costs incurred on the hotel’s newly refurbished rooms.

Outlook. Management anticipates stable performance primarily anchored by the long term office tenancy agreements. Going forward, we expect improved contribution from the hotel segment, as the second phase room refurbishment is expected to be fully completed by 3Q18.

Forecast. Maintain as the Results Were in Line.

Maintain HOLD, TP: RM7.88. We maintain our HOLD call with unchanged TP of RM7.88 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 - 16 Aug 2018