KLCC REIT’s 1HFY22 core PATAMI of RM326.6m was within estimates. DPS of 16 sen was declared in 1HFY22. The overall YoY improvement (+12.6%) was driven by better performance across all segments, mainly due to the transition to endemicity and lifting of movement restrictions. These led to a surge in retail footfall and hotel occupancy rate, though bottom line was partially mitigated by higher tax expenses and MI movement. Office properties remained fully occupied while retail and hotel occupancy stood at 92% and 32%, respectively. We maintain our forecast, reiterate HOLD with unchanged TP of RM6.81 based on FY23 DPU on targeted yield of 5.6%.

Broadly inline. 2QFY22 core net profit of RM165.2m (+2.3% QoQ, +14.7% YoY) lifted 1HFY22 sum to RM326.6m (+12.6% YoY), which was in line with both ours and consensus expectations at 49%.

Dividend. Declared 2QFY22 DPS of 8.0 sen per share, bringing 1HFY22 to 16.0 sen (SPLY: 7.00 sen and 14.0 sen, respectively).

QoQ. Revenue expanded (+8.9%) to RM350.3m, propelled by improved performance in (i) hotel (+60.8%) (ii) retail (+12.9%), and (iii) management services (+4.3%). Overall, the surge in hotel segment was due to reopening of international borders with increasing tourists and group events as well as F&B covers. Meanwhile, the growth in retail segment was attributable to the increase in advertising income and lower rental assistance. That said, office segment remained flattish, backed by its long-term leases with quality tenants. However, the above were mitigated by higher tax expenses (+42.8%) and MI movement (+19.3%). All in, these led to a marginal growth in core net profit (+2.3%) to RM165.2m.

YoY/YTD. Revenue rose (+25.0% YoY, +19.5% YTD) due to commendable growth in; (i) hotel (+275.9% YoY, 195.2% YTD; spurred by increase in both domestic and international tourists visitation which in turn elevated room occupancy rate and Average Room Rate (ARR) as well as group and events bookings), (ii) retail (+46.4% YoY, +34.2% YTD; underpinned by significant rebound in tenant sales, higher rental from new leases and advertising income, combined with decreasing rental assistance), (iii) management services (+12.9% YoY, +14.0% YTD; driven by additional car park bays secured and higher car park income). Nevertheless, the bottom line was partially offset by surge in MI movement (+99.8% YoY, +74.4% YTD) as well as tax expenses (+87.7% YoY, +58.3% YTD). Overall, core net profit rose by a slower clip to RM165.2m (+14.7%) and RM326.6m (+12.6%), YoY and YTD respectively.

Occupancy and gearing. Hotel occupancy climbed to 32% (1HFY21: 14%) while retail occupancy fell marginally to 92% (1HFY21: 94%). Office occupancy remained robust at 100%. Gearing level stood at 18.3% (FY21: 18.1%).

Outlook. Office segment is expected remain resilient as compared to other office - based REITs due to its long-term triple net leases with established MNCs (Petronas, ExxonMobil), which offer sustained occupancies and stable earnings visibility. On its retail segment, Suria KLCC’s traffic (currently at 60% of pre-pandemic levels) and tenant sales will continue to trend upward as international borders reopening spur tourists visitation. However, minimal rental assistance will remain in the near term, albeit with much stricter eligibility criteria according to the management. Similarly, the endemic phase bodes well for Mandarin Oriental Hotel as international tourists traditionally represented a sizable share of guests mix (70-75%).

Forecast. We maintain our forecasts as results were broadly in line.

Maintain HOLD, TP: RM6.81. Maintain HOLD with unchanged TP of RM6.81. Our TP is based on FY23 DPU on targeted yield of 5.6%, derived from 5-year historical average yield spread between KLCC REIT and MAG10YR. Maintain HOLD.

Source: Hong Leong Investment Bank Research - 10 Aug 2022