KLCC reported a moderate set of results – 1Q19 core net profit grew by 1.8% yoy to RM184m on the back of higher contributions from the retail and management services segments. Meanwhile, interim DPU grew by 1.1% yoy to 8.8sen. The results were within expectations. We maintain our HOLD rating with a higher SOTP-derived TP of RM8.14 after rolling forward our valuation horizon and lowering our discount rate in anticipation of stronger investor appetite for defensive assets. At 5% 2019E yield, KLCC is trading close to its 5-year historical mean, valuation looks fair.

1Q19 Core Net Profit Grew by 1.8%, Within Expectations

KLCC reported a moderate set of results – 1Q19 revenue grew by 2.4% yoy on higher contributions from the retail (+5.1% yoy) and management services segments (+5.2% yoy), more than offsetting the lower hotel revenue amidst stiff competition in the luxury hotel market. The notable growth in retail revenue was driven by higher average base rent (+2% yoy), improving occupancy (+1pts to 98%) and additional revenue from digital advertising. KLCC’s 1Q19 core net profit grew by 1.8% to RM184m on the higher revenue and the manager increased its 1Q19 DPU by 1.1% to 8.8 sen. Overall, the results were within market and our expectations – 1Q19 core net profit accounted for 25% of street’s and our full year forecasts.

Sequentially, Core Net Profit Fell by 0.8% to RM184m

KLCC’s 1Q19 core net profit contracted by a marginal 0.8% qoq to RM184m as all segments reported lower revenues due to seasonality. Lower maintenance expenses and higher recovery of utility charges cushioned the impact of lower revenues. Management has historically paid out uniform DPU during 1Q-3Q, followed by a bumper distribution in 4Q. This explains the sharp qoq decline in 1Q19 DPU.

Maintain HOLD With a Higher SOTP-derived TP of RM8.14

We maintain our HOLD rating on KLCC with a higher SOTP-derived TP of RM8.14 as we rollover our valuation horizon and incorporate a lower cost of equity of 7.6% (from 7.9%) in anticipation of higher investor demand for defensive assets, taking a cue from the compression in MGS yields and BNM’s OPR cut. At 5.0% 2019E yield, KLCC is trading near its 5-year historical average, valuation looks fair. Upside risks: further compression in MGS yields/OPR cuts. Downside risks: deterioration in the retail mall and hospitality markets.

Source: Affin Hwang Research - 8 May 2019