• We expect an earnings recovery for KLCC in 2021, driven by resilience in its office segment and better performance from its retail and hotel segment
• Allowance for nationwide domestic travel in Malaysia and positive development in COVID-19 vaccine distribution should lead to stronger economic activity in 2021
• Maintaining our HOLD rating on KLCC with a DDM-derived TP of RM7.88

Better earnings outlook in 2021

Moving away from a low base in 2020 and into a brighter 2021, we expect KLCCP Stapled Group (KLCC) to post better earnings in 2021E (+11.6% yoy to RM698m) though still shy of 2019 levels. KLCC’s earnings should be supported by the (i) resilience in office earnings given its long-term leases and triple-net lease agreements; (ii) better retail outlook in 2021 after positive development of COVID-19 vaccine distribution; and (iii) lower losses from the hotel segment. Nonetheless, we reiterate our view of 2021 being a year of two halves in which 1H21 will still see some weakness in retail and hotel earnings before improving more rapidly in 2H21.

Allowance of nationwide domestic travel in Malaysia should spur the economy

From our on-the-ground research we have observed better activity in Suria KLCC post the allowance of nationwide domestic travel in Malaysia on 7 December 2020. We believe this positive development will translate to better earnings from the retail segment. However, the sustainability of a recovery in Suria KLCC remains in question given the high number of COVID-19 cases in KL/Selangor which could lead to another interstate travel ban being implemented in the area within 1H21. Elsewhere, the hotel segment still recorded very low occupancy rates of 20% in November. We believe the catalyst to the hotel segment lies in the corporate/event bookings as occupancy is unlikely to improve until cross-border travel is allowed.

Maintain HOLD call with an unchanged target price of RM7.88

Overall, we maintain our HOLD rating on KLCC with an unchanged DDM-derived TP of RM7.88 as we believe the recent sell-off in the shares is overdone. We continue to like KLCC for its strong asset portfolio, defensive earnings stream and strong balance sheet. With a 5.2% 2021E dividend yield, KLCC is trading at +1SD of its past-7-year mean, which looks fair to us. Upside risks: sharp boost in consumer spending and strong recovery in hotel occupancy. Downside risks: sharp fall in consumer spending and deterioration in the retail mall and hospitality markets.

Source: Affin Hwang Research - 30 Dec 2020