KLCC reported another steady set of results – 9M18 core net profit grew by 1.7% yoy to RM541m on higher earnings across all asset segments, while 9M18 DPS grew by 1.2% yoy to 26.1 sen. All in, the results were within market and our expectations. We maintain our HOLD rating on KLCC with an unchanged SOTP-derived TP of RM7.55. With a 5.1% 2019E yield, KLCC’s valuation is within the historical average and looks fair.

9M18 Core Net Profit Grew by 1.7%, Within Expectations

KLCC’s 9M18 core net profit grew by 1.7% yoy to RM541m on higher EBIT contributions from all segments. The hotel and management services segments reported the highest yoy EBIT growth of 2.8% and 1.9% respectively, though their absolute EBIT contributions are relatively small. In tandem with the stronger earnings, management has declared a higher 9M18 DPU of 26.1 sen (+1.2% yoy). All in, the results were within market and our expectations – KLCC’s 9M18 core net profit accounts for 73-74% of the street and our full-year forecasts.

Sequentially, hotel segment has recovered, offices / retail remain solid

KLCC’s 3Q18 core net profit grew by 1.3% qoq to RM181m, driven by a recovery in hotel earnings. The hotel segment reported a RM1.5m pre-tax profit in 3Q18 (from a RM4.1m pre-tax loss in 2Q18) on a higher average occupancy rate and increase in the number of events hosted (the hotel saw event cancellations in 2Q18 due to the 14th General Election).

Elsewhere, 3Q18 earnings from offices and retail remain solid, backed by high occupancy rates of both offices (100%) and retail assets (98%). The higher 3Q18 retail occupancy of 98% (+1ppt qoq) and record tenant sales lifted 3Q18 retail revenue (+1.1% qoq) but an increase in operating costs resulted in a 2% decline in retail EBIT.

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

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

Source: Affin Hwang Research - 14 Nov 2018