KLCCSS’s 9M20 Earnings of RM474.0m (-13.1%) Were Within Ours But Came in Slightly Below Consensus’ Estimates. Overall, KLCCSS Has a Steady and Gradual Recovery Given the Easing of MCO. However, We Remain Cautious on KLCCSS’ Near-term Outlook, Seeing the Resurgence of Covid-19 Cases and Is Expected to Further Dampen the Recovery of the Retail and Hotel Segments. We Maintain Our Forecast as Well as Our HOLD Rating With An Unchanged of TP: RM8.35. While We Like KLCCCS for Its Resilient Office Segment and Prime Retail Location, We Remain Cautious on a Likely Slow Recovery, No Thanks to Covid-19 Headwinds.

Within expectations. 3Q20 core PATAMI of RM156.7m (+11.5% QoQ, -13.6% YoY) brought 9M20’s sum to RM474.0m (-13.1%). The results were within ours but slightly below consensus at 75.3% and 71% of full year forecast respectively.

Dividend. Declared 3 nd interim dividend of 7.50 sen per share (KLCC REIT: 5.87 sen, KLCC Property: 1.63 sen) going on ex on the 24th Nov 2020 (3Q19: 8.80 sen).

QoQ. Total revenue rose 17%, primarily driven by the retail (+42.1%), hotel (+237.4%) as well as management services segments (+10.8%) while revenue for office segment displayed flattish growth of 0.4%. Retail segment in 3Q saw a steady and gradual recovery in tenant sales and footfall, with increased rental from the new leases from the reconfiguration exercise of Parkson’s space while their hotel segment gained traction from “staycation” demand during weekend and improved F&B performance. PBT was also higher 19.3%, thanks to better contribution from its retail segment (+57.7%) and narrower losses at the hotel division (-RM16.3m in 3Q20 vs -RM20.4m in 2Q20). As such, core net profit improved by 11.5%.

YoY/YTD. Revenue was lower (-11.6% YoY, -11.7% YTD) primarily due to weaker contribution from retail (-15% YoY, -17.7% YTD) and hotel segments (-73.6% YoY, - 66.3% YTD), owing to rental assistance given to their tenants and lower occupancy in their retail and hotel segments following Covid-19 impact. In turn, core net profit was lower (-13.6% YoY, -13.1% YTD).

Outlook. We remain cautious on KLCCSS’ near-term outlook, seeing the resurgence of Covid-19 cases and is expected to further dampen the recovery of the retail and hotel segments. For retail segment, tenants’ sales in 3Q have recovered c.74% preCovid level, a little bit slower than other urban flagship malls (c.80 -85% recovery). We believe this is due to their higher exposure to tourists (c.20-30%) as compared to other flagships mall like Mid Valley (which have less than 10% tourists’ exposure). Also in 3Q, management shared that there is an increase in rental from the multiple new leases of the reconfiguration exercise of Parkson's space, which yield to higher rental rates (vs previously Parkson as the anchor tenant with a lower rent). Refurbishment of Phase 2 of the Signature Foodcourt has also completed and opened to public on 1st Nov 2020, which we believe will help to cushion the impact of rental assistance that will likely be given in 4Q. Hotel segment’s occupancy remain weak at 21% in 3Q (vs 24% in 2Q) and we expect the trend to continue as hospitality outlook remains bleak amid the pandemic. However, for office segment, we expect the contribution to remain resilient backed by their strong occupancy and long-term triple net lease agreement.

Forecast. Maintain Forecast as Results Were in Line

Maintain HOLD, with an unchanged of TP: RM8.35 based on FY21 forward DPS on targeted yield of 4.0%, derived from 2 years historical average yield spread of KLCCSS and MAGY10YR. While we like KLCCCS given its resilient office segment, prime retail location and Shariah compliant scarcity amongst REITs, we stay cautious on a likely slow recovery, no thanks to Covid-19 headwinds.

Source: Hong Leong Investment Bank Research - 11 Nov 2020