KLCCSS’ 4Q19 core PATAMI of RM125.9m (-30.6% QoQ, -24.3% YoY) brought the FY19 sum to RM671.7m (-5.1% YoY); the results were below both ours and consensus expectations due to higher-than-expected minority interests. Declared dividend of 8.80 sen per share. Overall, all segments showed a decent improvement, however, core PATAMI was affected due to higher-than-expected minority interest. We cut both earnings FY20-21 by 7% to reflect higher minority interest. We maintain our BUY call with a lower TP of RM8.42 (from RM8.53) based on targeted yield of 4.4%.

Below expectations. 4Q19 core PATAMI of RM125.9m (-30.6% QoQ, -24.3% YoY) brought the FY19 sum to RM671.7m (-5.1% YoY). The results were below both ours and consensus expectations, accounting for 91% and 92%, respectively. The deviation was due to higher-than-expected minority interests.

Dividend. Declared 4th interim dividend of 11.60 sen per share (KLCC REIT: 6.25 sen, KLCC Property: 5.35 sen) going ex on the 7th February 2020. This brought FY19 DPS to 38.0 sen (FY18: 37.0 sen).

QoQ. Top-line growth was up by 3.2% on the backed of improved performance of hotel operation (+11.3%) from higher occupancy. Whereas for retail, it also showed an increment of 5.4% where most seasonal events (i.e Christmas, pre New Year) occurred in 4Q19. However, core PATAMI was down by 15.9%

YoY. Revenue remained stable with a slight decrease of 0.4% due marginal decrease in retail segment by 0.3% mainly caused by lower advertising income and decrease in management service segment by 5.9% on the back of lower revenue from one-off projects. However, it was slightly mitigated by contribution from hotel segment by 7.4% due to higher occupancy in Mandarin Oriental, which in turn brought the core PAT to remain flattish (+1.4%). Nonetheless, due to higher-than-expected minority interest, core PATAMI fell by 24.3%.

YTD. Revenue increased marginally by 1.2% mainly contributed from retail segment (+2.3%), backed by higher rental rates and income from internal digital advertising, and improved performance from hotel operation (+3%) due to positive full year impact from the renovated rooms. Operating expenses ticked up marginally by 2.0% arising from higher depreciation in hotel and management service segment. Despite higher minority interest (+36.4%), core PATAMI remained stable at RM671.7m (-5.1%) on the back of improved performance.

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 full opening of anchor-to-specialty space reconfiguration at Suria KLCC by 1H20 and Visit Malaysia 2020, which expected to further boost its retail and hotel segments. Going forward, we also anticipate positive rental reversion from their office segment with the next rental revision happening as early as Jan 2020.

Forecast. We cut both earnings FY20-21 by 7% to reflect higher minority interest.

Maintain BUY, TP: RM8.42. We maintain our BUY call with a lower TP of RM8.42 (from RM8.53) based on FY20 forward DPS on targeted yield of 4.4% which is derived from 2 years historical average yield spread of KLCCSS and 10 year MGS. We like KLCCCS given its resilient office segment with long term triple-net tenancy, prime location retail and Shariah compliant scarcity amongst REITs (only 4/18).

Source: Hong Leong Investment Bank Research - 24 Jan 2020