KLCC reported an uninspiring set of results – 2017 core net profit grew by a mere 0.2%, in line with street but below our expectations. Operating profit from retail and offices slipped by 0.2-0.6% on minor margin erosion while the hotel segment recovered from its trough. We cut our 2018-19E EPS forecasts by 1-5%, incorporating weaker rental growth from retail assets. In tandem, we have trimmed our TP to RM7.78. Maintain HOLD. At 4.8% 2018E distribution yield, valuation is within historical trading range and we believe it is fair.

2017 Core Net Profit Grew by 0.2%, DPU Increased by 1.4%

KLCC’s 2017 core net profit grew by merely 0.2% yoy to RM720m on higher operating profit from its hotel business (+RM8.2m; +71% yoy). Operating profit from key segments – offices and retail stagnated at RM592m (-0.2% yoy) and RM398m (-0.6% yoy), respectively. The ongoing tenant remixing at Suria KLCC has resulted in a slight dip in occupancy rate, compensated by a lackluste rental growth (we estimate at c.2-3%). Overall, the results were within market expectation and but 6% below ours due to weak revenue and higher cost. KLCC declared a forth income distribution of 10.35 sen (4Q16: 9.85 sen), bringing its full-year distribution to 36.15 sen (2016: 35.65 sen).

4Q17 Core Net Profit Was Sequentially Higher by 6%

Sequentially, KLCC’s 4Q17 core net profit clocked in 6% higher at RM188m, driven by seasonally higher retail (+4% qoq) and hotel revenue (+12% qoq).

Trimming 2018-19E EPS by 1-5%

During our recent meetings with several retail-centric MREIT operators, we gather that consumer sentiment is still weak and most operators are cautious on 2018 market outlook. This, coupled with competition from new malls / e-commerce, should result in lower rental growth in 2018-19E. We trim our retail rental growth forecast to 2-3% (from 4-5%) and lower KLCC’s 2018-19E EPS by 1-5% to RM749m and RM796m, respectively.

Maintain HOLD With a Lower TP of RM7.78 (from RM8.00)

In tandem with our EPS cut, we lower our sum-of-parts derived target price to RM7.78 (from RM8.00). Maintain HOLD. While we continue to like KLCC for its strong asset portfolio, defensive earnings stream and robust balance sheet (0.08x net debt / asset), we believe the positives are largely priced-in. KLCC’s 2018E dividend yield of 4.8% is among the lowest in the sector.

Source: Affin Hwang Research - 25 Jan 2018