KLCC reported another steady set of results – 12M18 core net profit grew by 0.9% yoy to RM726.7m on higher earnings across all asset segments, while 12M18 DPS grew by 2.4% yoy to 37 sen. Broadly, 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 4.9% 2019E yield, KLCC’s valuation, comparable to its historical average and at a premium to peers, looks fair considering its iconic asset portfolio and robust balance sheet.

Steady 2018 Earnings, Higher DPU (+2.4% Yoy), Within Expectation

KLCC REIT reported a steady set of results – 12M18 revenue grew by 2.9% yoy on higher contributions across all segments. The 12M18 core net profit growth was, however, lower at 0.9% due to higher depreciation expenses arising from the newly refurbished hotel rooms. The retail segment was a star performer, registering 2.8% EBIT growth on higher rental rates and occupancy. The office segment continued to enjoy full occupancy and solid profitability (amidst weak EBIT growth of 0.5%); the hotel segment has, however, remained challenging due to stiff competition in the luxury hotel market. All in, the results were within market and our expectations. In tandem with the stronger earnings, management has declared a higher 12M18 dividend of 37 sen (+2.4% yoy).

Sequentially, Core Net Profit Grew by 2.2% to RM186m

KLCC’s 4Q18 core net profit grew by 2.2% qoq to RM185.5m, driven by higher revenue from the retail and management service segments. Notably, 4Q18 retail EBIT grew by 8.3% qoq to RM107.3m on higher turnover rent, positive rental reversions and the commencement of 7 new tenancies in 4Q18. This was however dampened by lower operating profit from the hotel segment due to lower F&B revenue and higher depreciation from the newly refurbished rooms.

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

We maintain our HOLD rating on KLCC 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, we believe the positives are largely priced in. With a 4.9% 2019E dividend yield, valuation is comparable to the historical average and at a premium to peers, 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 - 25 Jan 2019