• KLCCP Stapled Group (KLCC) reported a lower 1Q21 core net profit of RM146.1m (-9% qoq) mainly from weakness due to the reimplementation of MCO 2.0 during the quarter
• We deem the results to be within expectations as we expect earnings to improve as Malaysia progresses further in its inoculation programme
• Maintain BUY with an unchanged target price of RM7.88. At a 5.7% 2022E yield, valuation remains attractive

1Q21 Core Net Profit Fell by 9% Qoq, Within Expectations

KLCC’s core net profit fell by 9% qoq to RM146.1m mainly due to the re-imposition of MCO 2.0 from 13 January – 3 March 2021, which negatively affected contributions from all segments except the office segment (Fig 2). The retail segment saw higher provision of tenant assistance to affected retailers; the hotel segment saw some cancellation of room bookings and suspension of events while the management services segment was impacted by lower car park income and fewer one-off projects performed in facilities management. Nonetheless, the office segment remained resilient as it is backed by its triple net lease/long-term lease agreements. Overall, the results made up 22% of the street’s and 21% of our expectations, which we deem as in-line with expectations as we anticipate gradually lower need for rental assistance moving forward from the gradual easing of restrictions as more of the population become vaccinated. Notably, footfall recovered to 60% of pre-Covid 19 levels in March and 43% of FY2021 total retail lease renewal was completed.

Similarly, Core Net Profit Was Lower Yoy by 17.4%

On a yoy basis, KLCC’s 1Q21 core net profit fell by 17.4% yoy from lower contributions from all asset segments. Notably, revenue and pretax profit from the office segment fell by 3.3% and 2.9% respectively due to accounting adjustments following the extension of its Triple Net Lease agreements for Menara 3 and Petronas Twin Towers in November 2020. Overall, KLCC declared a DPS of 7 sen (-15.7% yoy and +4.5% qoq).

Maintain BUY With An Unchanged TP 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 strong balance sheet. With a 5.7% 2022E dividend yield, valuation looks attractive.

Source: Affin Hwang Research - 5 May 2021