KLCC REIT’s 9MFY22 core PATAMI of RM503.2m was within estimates. DPS of 24 sen was declared in 9MFY22. The overall YoY improvement was driven by robust showing across all segments, especially retail and hotel due to lifting of movement restrictions and return of foreign tourists. Going forward, we see office properties to remain stable while retail and hotel are expected to be boosted by the impending festive and holiday seasons in the coming quarters. We gathered that office properties remained fully occupied while retail and hotel occupancy stood at 92% and 40%, respectively. We maintain our forecast, reiterate HOLD with unchanged TP of RM6.50 based on FY23 DPU on targeted yield of 5.8%.

Inline. 3QFY22 core net profit of RM176.6m (+6.9% QoQ, +30.4% YoY) lifted 9MFY22 sum to RM503.2m (+18.3% YoY), which was in line with both ours and street expectations at 74%-76%.

Dividend. Declared DPU of 24.0 Sen YTD Vs 21.0 Sen. (3Q22: 8.0sen/unit, Ex-date: 24 Nov 2022)

QoQ. Revenue expanded (+6.8%), largely due to improvement in retail (+6.7%; resulting from increasing footfall and tenant sales) and hotel (+42.5%; supported by escalating F&B covers, rooms occupancy and group meetings/events at its hotel property). Office segment remained stable (-0.1%), backed by its long-term leases with quality tenants. While operating expenses followed suit (+6.0%), alongside a higher MI movement (+27.9%), core net profit rose (+6.9%).

YoY/YTD. Top-line climbed (+43.6% YoY, +27.1% YTD) underpinned by encouraging growth in; (i) retail (+96.1% YoY, +51.5% YTD); fueled by diminishing rental assistance, rising tenant sales and lifting of movement restrictions and (ii) hotel (+676.0% YoY, +315.7% YTD; propelled by recovery in room rates and occupancy, group meetings/events and better F&B performance. Office segment stayed flattish due to similar reasoning QoQ. Capped by surge in tax expenses due to Prosperity Tax (+152.5% YoY, +84% YTD) and MI movement (+376.4% YoY, +135.7% YTD), core net profit rose (+30.4% YoY, +18.3% YTD).

Occupancy and gearing. Hotel occupancy climbed to 40% (9MFY21: 11.7%) while retail occupancy fell marginally to 92% (9MFY21: 93%). Office occupancy remained robust at 100%. Gearing level stood at 18.4% (FY21: 18.1%).

Outlook. While the broader outlook for office market seems bleak due to the uptrending office vacancy rates and influx of office supplies that are poised to come on stream, we believe KLCC REIT’s office segment will remain resilient relative 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. Management also guided that office properties that are due for rental revision in 2023 will remain flattish. Separately, we believe retail and hotel segment will be supported by the impending festive and holiday seasons in 4Q22 and 1Q23, which will help sustain its performance moving forward.

Forecast. We Maintain Our Forecasts as Results Were in Line.

Maintain HOLD, TP: RM6.50. Maintain HOLD with unchanged TP of RM6.50. Our TP is based on FY23 DPU on targeted yield of 5.8%, derived from 5-year historical average yield spread between KLCC REIT and MAG10YR. Maintain HOLD.

Source: Hong Leong Investment Bank Research - 11 Nov 2022