KLCC reported a solid set of results – 9M19 core net profit grew by 0.8% yoy to RM545.7m on higher contributions from the office and retail segments, dampened by lower hotel earnings. In tandem, KLCC has declared a higher 9M19 distribution of 26.40 sen (+1.1% yoy). Overall, the results were in line with expectations – making up 75% of street and our estimates. We maintain our BUY rating with an unchanged TP of RM8.90. At a 5.0% 2020E yield, valuation looks attractive considering its defensive earnings profile and stable DPU growth.

9M19 Core Net Profit Grew by 0.8%, Higher DPU (+1.1% Yoy)

KLCC reported a solid set of results with 9M19 core net profit of RM545.7m (+0.8% yoy) as revenue contributions improved across all segments. Notably, 9M19 retail revenue grew to RM382.8m (+3.2% yoy) due to higher rental rates and strong advertising income in spite of the reconfiguration exercise at the mall which commenced in April 2019. Weaker earnings from the hotel segment have somewhat softened the positive growth from the retail and office segments. Overall, the results were within consensus and our expectations. In tandem, 9M19 DPU grew 1.1% yoy to 26.40 sen.

Sequentially, 3Q19 Core Net Profit Grew by 0.6% to RM181.4m

KLCC’s 3Q19 core net profit grew by a marginal 0.6% qoq to RM181.4m on the back of a higher revenue of RM353.5m (+0.7% qoq), attributable to the higher occupancy rate in the Mandarin Oriental KL Hotel and contribution from one-off projects under the facilities management operations. This was, however, dampened by a lower share of profit received from an associate company (Menara Maxis) due to a one-off adjustment. We expect the quarterly associate earnings to recover to RM3.3m in the next quarter.

Maintain BUY With An Unchanged SOTP-derived TP of RM8.90

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 RM8.90. 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 5.0% 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 - 12 Nov 2019