KLCC REIT’s FY22 core PATAMI of RM654m (+2.1 YoY) was within estimates. DPS of 38 sen was declared in FY22 vs 33.6 sen in FY21. The YoY improvement was driven by better performance across in retail and hotel segments, owing to the transition to endemicity and lifting of international borders which drove retail footfall, tenancy sales and hotel’s occupancy rate, albeit bottom line was mitigated by higher tax expenses due to prosperity tax and MI movement. Office properties remained fully occupied while retail and hotel occupancy stood at 92% and 44%, respectively. Maintain our forecast and HOLD call with unchanged TP of RM6.50.

Closing inline. 4QFY22 core PATAMI of RM150.8m (-14.6% QoQ, -29.9% YoY) brought FY22 sum to RM654.0m (+2.1% YoY), which was in line with ours (99%) but below consensus expectations at 94%. Core PATAMI was arrived after excluding fair value gain of investment properties (RM128.7m).

Dividend. FY22: DPU of 38.0 sen vs 33.6 sen SPLY. (4Q22: 14.0 sen vs 4Q21: 12.6 sen)

QoQ. Revenue expanded (+10.5%) mainly due to the increase in management services revenue (+63.9%) arising from improved car park income and completion of facilities management work. Nonetheless, total opex rose (+37.2%) due to reversal of rental assistance in 3Q22. This led to a slight decline in core PBT (-2.8%). With higher MI movement (+94.2%), albeit lower tax expenses (-27.2%), core PATAMI fell (-14.6%).

YoY. Top line rose (+18.7% YoY) due to positive growth in (i) hotel (+113.4% YoY; driven by increase in both tourists visitation which in turn elevated room occupancy rate and Average Room Rate (ARR) as well as group and events bookings), (ii) retail (+4.5% YoY; lifted by lower rental assistance, higher revenue rents and advertising income), (iii) management services (+39.3% YoY; underpinned by increased car park income and completion of a facilities management work). Despite recording higher total opex (+36.9% YoY), core PBT rose (+10.7% YoY). However, due to higher tax expenses (+262.9%) in comparison with FY21 which KLCC REIT enjoyed special deduction on rental rebate as well as MI movement (+637.9%), core bottom line decreased -29.9%.

YTD. Revenue climbed 24.6% on the back of improving hotel (+215.8%), retail (+36.0%) and management services (+22.9%) arising from the aforementioned reasons on YoY review. In turn, core PBT rose 25.3%. Dragged by increased tax expenses (237.8%) mainly attributed to prosperity tax and special deduction from rental rebate in FY21 as well as MI movement (+237.6%), core PATAMI edged up 2.1%.

Occupancy and gearing. Hotel occupancy climbed to 44% (FY21: 16%) while retail occupancy remained stable at 92% (FY21: 93%). Meanwhile, office occupancy remained robust at 100%. Gearing level stood at 18.1% (FY21: 18.3%).

Outlook. Office market remains in the doldrums stepping into 2023 as new office buildings continue flooding the market and subsequently hamper the industry’s occupancy and rental rates. Cushioned by its long-term triple net leases with established MNCs (Petronas, ExxonMobil), KLCC REIT’s office portfolio should fare relatively resilient. Retail segment is expected to remain buoyant due to festive seasons in 1H23 as well as borders reopening of many parts of the world (including China) which we believe will continue elevating footfall of foreign tourists in Suria KLCC. Likewise, Mandarin Oriental Hotel will continue to deliver improvements in tandem with the gradual revival of the tourism sector.

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

Maintain HOLD, TP: 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 - 2 Feb 2023