KLCC reported a solid set of results – 2019 core net profit grew by 0.8% yoy to RM732.1m on resilient contributions from the retail segment, despite its ongoing reconfiguration exercise and stronger performance from the hotel segment post the refurbishment exercise last year. In tandem, KLCC declared a higher distribution of 38 sen (+2.7% yoy). Overall, the results were in line with our expectations but below market. We maintain our BUY call with an unchanged TP of RM8.90. At 5.0% 2020E yield, valuations look attractive considering its defensive earnings profile and dividend payment.

Resilient Retail and Higher Hotel Contributions Boost Income

KLCC’s 2019 core net profit grew by 0.8% yoy to RM732.1m on the back of higher revenue (+1.2% yoy) and stable NPI margin of 72%. KLCC reported higher earnings across all segments (Fig 2); notably, the retail segment delivered an increase of 2.3% yoy to RM514.7m despite the reconfiguration exercise at the mall. Elsewhere Mandarin Oriental KL Hotel enjoyed better F&B performance and higher revenue per available room from higher occupancy (64% in 2019, from 55% in 2018) post refurbishment exercise. The full year DPS came in at 38 sen, an increase of 2.7% yoy. Overall, the results were within our expectations but below consensus forecasts.

4Q19 Core Net Profit Grew by 2.7% Qoq to RM186.4m

4Q19 core net profit grew 2.7% qoq, driven by higher revenue (+3.2% qoq), arising from higher contributions from the retail (+5.4% qoq) and hotel (+11.3%) segments, which more than offset a slight decrease in the office revenue (-0.5%). Meanwhile, EBIT margin remains sturdy at 71%. Management has declared a DPS of 11.60 sen in 4Q19 (from 8.80 in 3Q19); KLCC has typically declare higher dividend in the 4Q.

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

The Phase 1 of the reconfiguration exercise is now completed but the opening is slightly delayed, pending approvals from the authority. Meanwhile, the Phase 2 reconfiguration will commence in early February and scheduled to open in 2Q2020. We tweaked our 2020-21E EPS forecasts by -0.2% after incorporating the full year financial statements. 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. At a 5.0% 2020E yield, valuation looks attractive considering its defensive earnings and steady DPS growth. Downside risks: downturn in the retail mall and hospitality markets.

Source: Affin Hwang Research - 24 Jan 2020