KLCCSS’s 1Q19 core PATAMI of RM184.0m (+10.5% QoQ, +1.8% YoY) was in line with both ours and consensus expectations. The improvement was mainly driven by better retail and management services segments. However, this was partially offset by lower contribution from hotel segment. We updated our projection based on FY18 audited account which revised our EPS19-20 by less than 1%. Also, we revise our 10-year MGS yield assumption to 3.9% (from 4.1%) and roll forward valuation to mid FY20. We maintain HOLD call with higher TP of RM8.12 (from RM8.06) based on targeted yield of 4.8% (from 4.9%).

Within expectations. 1Q19 gross revenue of RM353.4m (-3.5% QoQ, +2.4% YoY) translated into core PATAMI of RM184.0m (+10.5% QoQ, +1.8% YoY). The results were in line with both ours and consensus expectations, accounting for 24.9% and 24.6%, respectively.

Dividend. Declared 1st interim dividend of 8.80 sen per share (KLCC REIT: 6.28 sen, KLCC Property: 2.52 sen) going on ex on the 23rd May 2019 (1Q18: 8.70 sen).

QoQ. Revenue dipped by 3.5% to RM353.4m (4Q18: RM366.3m) but this was followed by an increase of 10.5% in core PATAMI at RM184.0m. Revenue decline resulted mainly from the lower contribution from hotel operations. The hotel segment was affected by poorer demand in banqueting, and further impacted by slower meeting activities. The decline in revenue was more than mitigated by the reduction in operating expenses by -9.8%.

YoY. RM353.4m of gross revenue in 1Q19 showed a lift of 2.4% (1Q18: RM345.1m), which was followed by an increase in core PATAMI by 1.8% at RM184.0m. The improvement was backed by the growth in all business segments except for hotel; (i) office segment contribution was driven by full occupancy as well as lower repair and maintenance expenses paired with higher recovery of utility charges at Menara ExxonMobil; (ii) retail segment improved resulting from higher rental rates and better occupancy, also higher income from the mall’s internal digital advertising through its media and advertising screen and panels; and (iii) management services segment (i.e. facilities and car parking management) was lifted thanks to additional revenue under facilities management; new contracts for the Workplace for Tomorrow project for PETRONAS and one-off facility management works of car park in Mesra Mall, Kertih, Terengganu. The overall rise was slightly offset by a drop in hotel segment revenue contribution. Even though hotel has fully refurbished rooms and occupancy increased to 64% (from 1Q18: 53%), revenue dropped mainly due to lower demand in banqueting and meeting activities.

Outlook. Management anticipates stable performance mainly on the back of its long term office tenancy agreements. Going forward, we do expect improved contribution from the hotel segment with its fully refurbished rooms as well as retail segment with the tenant reconfiguration exercise of 124k sqft space which begun in April 2019 with expected completion by 1HFY20.

Forecast. Although results were in line, we updated our projections based on FY18 audited accounts, which revised our FY19-20 EPS by 0.2% and 0.3% respectively.

Maintain HOLD, TP: RM8.12. Maintain our HOLD call with higher TP of RM8.12 (from RM8.06) based on FY19 targeted yield of 4.8% (from 4.9%). We revise our assumption of the 10-year MGS yield to 3.9% (from 4.1%; currently at 3.8%), following the dovish tilt by major central banks (Fed and ECB) as well as BNM. We also roll forward valuation to mid-FY20 and introduced FY21 estimates. To note, our valuation model is based on the targeted yield of 2-year historical average yield spread between dividend yield and 10-year MGS yield

Source: Hong Leong Investment Bank Research - 8 May 2019