KLCCSS’ 3Q19 core net profit of RM181.4m (+0.6% QoQ, +0.0% YoY) brought the 9M19 sum to RM545.7m (+0.8% YoY). The results were in line with both ours and consensus expectations. Declared dividend of 8.80 sen per share. The stable performance was due to slight growth in all business segments but was slightly offset by hotel segment due to slower banqueting events and lacklustre F&B performance. We maintain our BUY call with unchanged TP of RM8.53 based on FY20 forward DPS on targeted yield of 4.6%.

Within expectations. 3Q19 core net profit of RM181.4m (+0.6% QoQ, +0.0% YoY) brought the 9M19 sum to RM545.7m (+0.8% YoY). The results were within both ours and consensus expectations, accounting for 74% and 75%, respectively.

Dividend. Declared 3rd interim dividend of 8.80 sen per share (KLCC REIT: 6.24 sen, KLCC Property: 2.56 sen) going ex on the 25 November 2019 (3Q18: 8.70 sen).

QoQ. Top-line growth remained flattish at +0.7% as the increase at hotel operation (+5.5%) was offset by the declining retail segment (-2.0%). For hotel, it improved on the back of higher occupancy and revenue from one-off projects under the facilities management operations (+7.0%). Whereas for retail, it was hampered by weaker advertising income where most seasonal events (Hari Raya, Fashion Week) occurred in 2Q19. Consequently, core PATAMI stayed flat at RM181.4m (+0.6%).

YoY. Revenue remained stable with a slight increase of 1.2% due to the increase in management services (+8.6%) but was mitigated by hotel operations (-3.1%), given slower banqueting events and lacklustre F&B performance. Although there was a reconfiguration exercise at Suria KLCC, which commenced in the previous quarter, revenue for retail segment stayed flat (+0.7%) due to better rental rate and strong advertising income, with the on boarding of 4 new tenants in 3Q19.

YTD. Revenue increased by 1.8% mainly contributed from retail segment (+3.2%), backed by higher rental rates and income from internal digital advertising, increase in management service (+2.1%) and improved performance from hotel operation (+1.4%). Operating expenses ticked up marginally by 2.9% arising from higher depreciation in hotel and management service segment. Distributable income was higher by 5.9% attributable by upward rental revision to the lease for Petronas Twin Tower (which took effect in Oct 2018).

Outlook. Management anticipates stable performance mainly on the back of its long term office tenancy agreements. Furthermore, we expect better contribution for FY20 due to Phase 1 opening of anchor-to-specialty space reconfiguration schedule on Dec 2019 and Visit Malaysia 2020. Going forward, we also anticipate positive rental reversion from their office segment with the next rental revision happening as early as Jan 2020.

Forecast. Maintain as the Results Were in Line.

Maintain BUY, TP: RM8.53. We maintain our BUY call with unchanged TP of RM8.53 based on FY20 forward DPS on targeted yield of 4.6% which is derived from 2 years historical average yield spread of KLCCSS and 10 year MGS. Our implied TP is based on 1.0x 2020 P/B which is above its 5-year mean of 0.89x but in line to sector’s 1.0x. In our view, the stock should trade on par to peer valuation given its resilient office segment with long term triple-net tenancy, prime location retail and its Shariah complaint status.

Source: Hong Leong Investment Bank Research - 18 Nov 2019