• KLCCP Stapled Group (KLCC) reported a lower 9M20 core net profit of RM474m (-13.1% yoy) mainly due to operating losses from the hotel segment and rental assistance to retail tenants.
• The results were slightly below market and our expectations.
• In view of the prolonged weakness in the domestic retail and tourism segments following the reimplementation of CMCO, we cut our 2020-22E earnings by 2- 6%. Reaffirm HOLD rating with a lower price target of RM7.88.

9M20 core net profit fell by 13.1% to RM474m

Notwithstanding a stable contribution from the office segment, KLCC’s 9M20 core net profit fell by -13.1% yoy to RM474m due to lower EBIT from the retail (-20.1% yoy) and management services (-12.0 yoy) segments and a loss from the hotel segment (-RM34.8m). The earnings decline was due to rental assistance to retail tenants, lower advertising and car park income, and low hotel occupancy. Tracking the lower earnings, KLCC’s 9M20 DPS came in lower at 23.30 sen (-11.7% yoy). Overall, results were slightly below market and our expectations – making up 71% and 72% of street and our full-year expectations, attributable to weaker-than-expected earnings from the retail and hospitality segments.

Sequentially, 3Q20 core net profit was 11.5% higher qoq

Sequentially, KLCC reported a higher core net profit of RM156.7m (+11.5% qoq), driven by better contributions from all asset segments. Notably, lower rental assistance was granted to the retail tenants during the quarter while new leases from the refurbished space saw higher rental rates. Meanwhile, the hotel segment saw better earnings from higher corporate bookings and staycation demand during the RMCO period. Elsewhere, the other segments also registered a sequential increase in revenue (Fig 2).

Maintain HOLD with a lower SOTP-derived TP of RM7.88

We cut our 2020-22E core EPS forecasts by 5.6/2.9/2.2% after incorporating further rental assistance and prolonged weakness in the hotel segment, in view of the rising Covid-19 cases and reimplementation of CMCO. In tandem, we lower our SOTP-derived TP to RM7.88 (from RM7.91). Maintain HOLD. At 4.8% 2021E yield, valuation is within its 7-year average, which looks fair. Upside risks: sharp increase in consumer spending and strong recovery in hotel occupancy. Downside risks: sharp decline in consumer spending and deterioration in the retail mall and hospitality markets.

Source: Affin Hwang Research - 11 Nov 2020