KLCC reported a robust set of results – 6M19 core net profit grew by 1.3% yoy to RM364.3m on higher contributions from the retail, office and hotel segments. In tandem, KLCC has declared a higher 6M19 distribution of 17.6 sen (+1.1% yoy). All in, the results were within consensus and our expectations – 6M19 core earnings made up 50% of the street’s and our full-year forecasts. We maintain our BUY rating with an unchanged TP of RM8.55. At a 5.1% 2020E yield, the valuation looks attractive considering its defensive earnings profile and stable DPU growth.

6M19 Core Net Profit Grew by 1.3%, Within Expectations

KLCC reported a robust set of results – 6M19 core net profit grew by 1.3% yoy to RM364.3m mainly on higher EBIT from the retail (+2.5%) and hotel (+10.8%) segments as well as defensive contribution from the office segment (+0.9% yoy). Notably, 6M19 retail revenue grew by 4.4% yoy on higher rental rates and revenue from internal advertising income in spite of the reconfiguration exercise at the mall which commenced in April 2019. In tandem, 6M19 DPU increased by 1.1% yoy to 17.6 sen. Overall, the results were within market and our expectations – KLCC’s 6M19 core net profit accounted for 50% of the street’s and our full-year forecasts.

Sequentially, 2Q19 Core Net Profit Fell by 1.9% to RM180.4m

KLCC’s 2Q19 core net profit contracted by 1.9% qoq to RM180.4m due to lower revenue from the retail segment (-1.7% qoq) attributable to seasonality and the reconfiguration exercise at the mall (reconfiguration of the former Parkson space to specialty shops / F&B). KLCC had also incurred higher marketing and promotional expenses in 2Q19, in conjunction with the festive season.

Maintain BUY With An Unchanged SOTP-derived TP of RM8.55

Overall, the results were within our expectations. Phase one of the reconfiguration exercise is on schedule for completion by end-2019. We maintain our BUY rating on KLCC with an unchanged SOTP-derived TP of RM8.55. We continue to like KLCC REIT for its defensive rental income, backed by triple net leases, high asset occupancy and sustainable yields in times of an economic downturn. We anticipate higher investor demand for defensive assets, taking a cue from the compression in MGS yields. At a 5.1% 2020E yield, the valuation looks attractive considering its defensive earnings and steady DPU growth. Downside risks: downturn in the retail mall and hospitality markets.

Source: Affin Hwang Research - 21 Aug 2019