• We expect KLCC REIT’s (KLCC) earnings to remain stable on the back of its solid assets – office segment earnings to remain defensive while an earnings recovery is expected in the retail and hotel segments
• Backed by triple net leases and long-term leases, high and stable occupancy, as well as low gearing, we believe KLCC would be able to continue its dividend growth post 2021
• Maintain Our BUY Rating on KLCC With a TP of RM7.88

Defensive Earnings Supported by Office Lease Structure

KLCC’s earnings are defensive given its largest revenue and operating profit contributor, the office segment, is backed by triple net leases and long-term leases which are subject to a 10% increment every 3 years. As such, although the workfrom-home / hybrid working arrangement has gained traction, we do not expect this to pose a threat to KLCC’s office earnings nor occupancy over the long term.

Poised for Earnings Recovery in 2021

Its Suria KLCC shopping mall has also recorded resilient occupancy rates at 97-98% throughout 2020 and is poised for an earnings recovery as we expect rental assistance extended to tenants to gradually ease following the roll-out of Covid-19 vaccines. The easing of restrictions on gatherings and domestic travel should also spur activities in the malls, lead to a gradual return of the workforce to the office and contribute to a pick-up in staycations and event/corporate bookings.

A Good Opportunity to Collect a Quality REIT With Solid Assets

KLCC has a strong balance sheet with a gearing ratio of 13% which is the lowest among the MREITs. Further, excluding the slump in 2020, KLCC has continually grown its dividend – it has managed to raise its dividend per share by 1-3% pa since 2015. We believe that this, coupled with its share price that has pulled back to its 2018 lows, provides a good opportunity to pick up a quality stock with sustainable yields, especially considering the earnings recovery expected in 2021-2022 and its stable long-term earnings prospects.

Maintain BUY Call With An Unchanged 12-month Target Price of RM7.88

Overall, we maintain our BUY rating and target price of RM7.88. We continue to like KLCC REIT for its defensive office rental income, backed by triple net leases, a strong asset portfolio and a strong balance sheet. With a 5.7% 2022E dividend yield, its valuation looks attractive. Downside risks: a sharp decline in consumer spending and deterioration in the retail mall and hospitality markets.

Source: Affin Hwang Research - 16 Apr 2021