KLCC reported a moderate set of results – 1H18 core net profit grew by 1.4% to RM360m on higher earnings contributions from the retail and management services segments. In tandem, 1H18 DPS grew by 1% to 17.4sen. Overall, the results were within market and our expectations. We reiterate our HOLD rating on KLCC with an unchanged SOTP-derived price target of RM7.55. At 5.1% 2019E yield, KLCC’s valuation is within historical trading average, looks fair.

1H18 Core Net Profit Inched Up 1% to RM360m, Within Expectations

KLCC’s 1H18 core net profit inched up by 1.4% yoy on higher EBIT contributions from all segments, especially management services (+7.1% yoy) and retail (+1.2% yoy). In tandem with the stronger earnings, management has declared a higher 1H18 DPU of 17.4 sen (+1.2% yoy). KLCC’s 1H18 core net profit accounts for 49% of the street and our full year earnings forecasts - within expectations.

Sequentially, Hotel Segment Has Weakened

KLCC’s 2Q18 core net profit slipped by 0.8% qoq to RM179m due to a RM4.1m pretax loss from the hotel operations (from PBT of RM2.4m), partly cushioned by higher PBT from retail (+1.5% qoq) and management services (+21.1%). The weak 2Q18 hotel earnings were because of seasonality and event cancellations due to the 14th General Election.

Mature Assets, Muted Growth

KLCC’s flagship retail asset, Suria KLCC, is enjoying a high occupancy rate of 97%. Looking ahead, management expects Suria KLCC’s rental reversion to hover between 1-2%. Elsewhere, its offices are enjoying 100% occupancy, backed by triple net leases and long-term lease with ExxonMobil. Overall, KLCC’s assets are mature and we expect muted earnings growth of between 1-3% for 2018-20E.

Maintain HOLD With An Unchanged SOTP-derived TP of RM7.55

We reiterate our HOLD rating and maintain our SOTP-derived target price to RM7.55. While we like KLCC for its strong asset portfolio, defensive earnings stream and robust balance sheet (0.09x net debt / asset), we believe the positives are largely priced in. At 5.1% 2019E dividend yield, valuation is comparable to historical average, looks fair. Key upside risk is a change in market expectations from rising interest rates to rate cuts; downside risk is further deterioration in the retail mall market.

Source: Affin Hwang Research - 16 Aug 2018