1H19 saw better contributions by all business segment except for management services due to one-off projects in Kertih back in FY18. Office was stable at 100% occupancy, whereas retail and hotel showed improvement due to higher rental rates achieved and better occupancy respectively. Going forward, we expect stable performance for office segment and better contribution from hotel and retail segments with the anticipation of Visit Malaysia 2020. We retain our forecast and maintain BUY with unchanged TP of RM8.51 based on targeted yield of 4.7%. We like KLCCSS for its resilient office segment (long term tenancy), prime location retail, and Shariah complaint status.

We Attended KLCCSS’ Analyst Briefing and Walked Away Feeling Slightly Positive.

1H19 results recap. 2Q19 results came in within expectations with core net profit of RM180.4m (-1.9% QoQ, +0.7% YoY), bringing 1H19 sum to RM364.3m (+1.3%). The lift YTD was mainly contributed by higher revenue in all business segments; especially from hotel (+3.9% due to fully refurbished rooms) and retail (+4.4% on higher rental rates achieved).

Office segment. Occupancy for office portfolio remained at 100%. Furthermore, its “Workplace For Tomorrow” initiative at all office buildings that caters to personalized needs would aid in promoting productivity and building efficiency, is currently 77% completed, with full completion expected to be by end FY19. This initiative will entice loyalty of tenants, promote stickiness as well as keeping their office segment up to the date with the current environment. Apart from that, Menara Dayabumi has commenced AEI (2Q19) to enhance the attractiveness and visibility to the retail offerings and this initiative is expected to be completed by 4Q19.

Retail segment. Performance from Suria KLCC is satisfying with moving annual turnover (MAT) tenant sales growing 1.9% YoY further shows resiliency of the mall. Moreover, the ongoing tenant reconfiguration is expected to contribute to higher rental rates from new tenants, this is due to the exit of Parkson which will be replaced by approximately 80-100 new tenants. Notably, 5 new tenants came on board in 2Q19. Additionally revenue from internal digital advertising (+35.4% YoY) also backed the better performance.

Hotel segment. Stronger hotel performance was driven by increased occupancy rate (thanks to newly refurbished rooms) coupled with better F&B contributions (increase in banqueting paired with several corporate events). Furthermore, the new reopening of the newly renovated Mandarin Grill (2Q19) with an interesting Italian Grill concept that features 2-Michellin star chef, should help woo customers. Hotel’s occupancy currently stood at 60% (2Q18: 50%).

Management services. YTD showed a slight drop, due to one off projects in Kertih in FY18. However, new initiative includes the newly launched iConik (2Q19) which is a mobile parking application that aids in easy payment and to provide parking rate and availability of parking lot (only in KLCC). This advancement of technology will elevate quality of service and operational efficiency.

Gearing. Gross gearing ratio increased slightly to 17.8% (FY18: 17.1%) with extended average maturity period of 5.1 years (FY18: 3.8 years) and average cost of debt maintained at 4.6% (fixed rate borrowings: 84%).

Outlook. We expect stable contribution from office segment on the back of its long term office tenancy agreements, along with better contribution from hotel and retail segments through higher expected footfall from Visit Malaysia 2020.

Forecast. Maintain.

Maintain BUY, TP: RM8.51. We maintain our BUY call with unchanged TP of RM8.51 based on targeted yield of 4.7% which is derived from 2 years historical average yield spread of KLCCSS and 10 year MGS. We like KLCCSS for its resilient office segment with long term tenancy, prime location retail and its Shariah complaint status.

Source: Hong Leong Investment Bank Research - 22 Aug 2019