KLCC Property Stapled Group’s (KLCCPSG) 9MFY17 earnings at RM532.4m (-1.2% yoy) is tracking behind our expectations (constitutes around 70% of our full-year forecast), but is within consensus expectations. However, we are keeping our forecasts unchanged, as we are of the view that earnings will likely pick up on improvement in the overall occupancy rate for its hotel and higher rental income from its retail segment. 3QFY17 DPS came in at 8.6sen. Maintain HOLD.

Expecting Stronger 4Q From the Retail Segment

Although earnings over the past 3 quarters have been relatively flat at RM176-178m, we believe that 4Q could deliver better numbers on improving performance from its retail and hospitality segments. For the retail segment, 4QFY17 will deliver the full impact of the rent review that became effective in 3Q, and higher rentals from the new tenants that recently started operations. The moving average turnover (MAT) at Suria KLCC has grown by more than 5% yoy, indicating better performance from its tenants. Hence, we believe that PBT for the segment will record a growth for the year, rather than the -0.1% yoy recorded for 9MFY17.

Office Performance Is Stable, Some Upside From Hospitality

The performance of the office segment was relatively flat qoq as most of the assets are either on a long-term lease or triple net lease, which has a lower volatility profile. The hospitality segment has recovered from the losses in 2Q, and delivered RM2.4m of PBT in 3Q, as the occupancy rate has normalised post-Ramadan and given the better performance from its F&B segment. We expect overall performance to improve in the coming quarters, due to an increase in the inventory of newly renovated rooms.

Maintain HOLD; TP Unchanged at RM8.00

We maintain our HOLD rating on KLCCPSG with a 12-month Dividend Discount Model-derived price target of RM8.00 (including RM0.26 from the redevelopment of Dayabumi and RM0.24 from the potential development of Lot D1). We believe that KLCCCP’s longer-term potential is underpinned by an asset-injection pipeline of approximately RM5.8bn (backed by its strong parent company) and its attractiveness as a Shariah-compliant stock.

Source: Affin Hwang Research - 14 Nov 2017