KLCCSS’ 4Q20 core PATAMI of RM182.1m (+16.2% QoQ, +44.6% YoY) brought FY20’s sum to RM656.1m (-2.3% YoY); the results were within both ours and consensus expectations. Declared 4th interim dividend of dividend of 6.70 sen per share. We tweak our forecasts to account for some minor book keeping adjustment and our FY21-22 earnings are revised up by +3%. Despite the slight increase in forecast, TP falls to RM8.06 (from RM8.35) as we now use a targeted yield 4.2% (from 4.0%) which is the mean yield spread tagged to FY21 DPU. Nonetheless, due to share price weakness (-13% since 12 Nov 2020), there is now sufficient buffer to warrant a BUY (from Hold).

Within expectations. 4Q20 core PATAMI of RM182.1m (+16.2% QoQ, +44.6% YoY) brought FY20’s sum to RM656.1m (-2.3% YoY). The latter was achieved after adjusting for fair value gain and impairment totalling a net RM223.9m. The results were within both ours and consensus expectations, accounting for 103% and 102%, respectively.

Dividend. Declared 4th interim dividend of 6.70 sen per share (KLCC REIT: 5.70 sen, KLCC Property: 1.00 sen) going ex on 11 Feb 2021. This brought FY20 DPS to 30.0 sen (FY19: 38.0 sen).

QoQ. Revenue fell slightly to RM304.7m (-2.5%) primarily due to the re-imposition of CMCO which included interstate travel restrictions. Hence, KLCCSS saw weakness especially in its hotel (-17.3%) and retail (-4.6%) segments. However, after excluding one off impairment of RM81.4m and fair value gains of RM142.5m, alongside lower tax expense (-57.8%), core PATAMI rose to RM182.1m (+16.2%); this was also led by favourable MI movement, since it booked in headline losses during the quarter.

YoY/YTD. Revenue reduced (-16.5% YoY, -12.9% YTD) mainly due to hotel (-80.3% YoY, -70.2% YTD) and retail segment (-25.2% YoY, -19.6% YTD). Hotel segment was severely affected due to MCO and travel restrictions with cancellation of rooms and suspensions of events, whereas retail segment was mainly due to various assistance packages that were provided and lower digital advertising income. However, this was slightly cushioned with the better contribution from management service (+33.7% YoY, +22.4% YTD) from the new business approach in facility management services. Office segment remained relatively stable (-4.0% YoY, -1.0% YTD), backed by its long term Triple Net Lease tenancies. Overall, core PAT fell by similar percentages (-13.4% YoY, -15.5% YTD). That said, impact to core PATAMI was less profound (+44.6% YoY, - 2.3% YTD), again thanks to favourable MI movement.

Occupancy and gearing. Retail occupancy fell marginally to 97.5% (from FY19: 98.8%) while hotel occupancy fell drastically to 27% (from FY19: 62%). Office occupancy remained at 100%. Gearing level remained at 18%.

Outlook. Management anticipates stable showing on the back of its long-term office tenancy agreements. However, we remain cautious especially on the hotel and retail segments amidst the ongoing MCO (scheduled to end on 4 Feb) and increasing Covid- 19 cases in the near term. We expect muted trend in hotel occupancy with interstate travel ban and uncertainty of borders reopening any time soon. For retail segment, KLCCSS will progressively offer tenant support measures on a case-by-case basis.

ESG update. During the year, KLCCSS has successfully reduced 21% of energ y consumption as electricity were used more prudently throughout the pandemic as well as eliminated 68% of single use plastics in their hotel operations. Apart from that, a contribution totalling to RM95.3m was made on social-relief deed; inclusive of various assistance packages to retail tenants and charities. KLCCS has also attained  ISO37001:2016 certification through their implementation of Anti-Bribery Management System and achieved 43% of women on board (>Malaysia’s aspiration target of 30%).

Forecast. We tweak our forecasts to account for some minor book keeping adjustments and our FY21-22 earnings are revised up by +3%.

Upgrade to BUY, TP: RM8.06. Despite the slight increase in forecast, our TP falls to RM8.06 (from RM8.35) as we now apply a targeted yield 4.2% (from 4.0%) which is the average mean spread, to account for continued weak hospitality industry on FY21 DPU. Nonetheless, due to share price weakness (-13% since 12 Nov 2020), there is sufficient buffer to warrant a BUY (from Hold). Although we believe hotel segments will still take a while to recover, we feel at this juncture, the drawbacks are largely priced in.

Source: Hong Leong Investment Bank Research - 29 Jan 2021