Period     2Q13 / 1H13 

Actual vs. Expectations   1H13 core earnings of RM283m are generally within expectations, making up 50% of street estimates and 47% of ours. Although it only achieved 42% of the core earnings forecast in its listing prospectus, we regard it as ‘in line’ because of the prospectus assumption that the Stapled REIT structure will be effective 1-Jan-13, when it actually started later on 2-Apr-13. 

Dividends    2Q13 DPS of 7.45 sen (including 3.19 sen from KLCC REIT, which is subjected to withholding tax) or 95% payout of distributable income, which is in line with our assumptions. Hence, 1H13 NDPS of 11.63 sen (94% payout) made up 44% of our estimate.  

Key Results Highlights   YoY, 1H13 PBT rose 13% to RM427m largely due to PETRONAS Twin Towers long-term lease renewal in Oct-12 and a new income stream from M3P-Retail. This was sufficient to negate the 35% decline in Mandarin Oriental’s (MO) PBT as we reckon occupancy rates and non-room revenues were affected by the general election and refurbishments. Core earnings surged 46% because the KLCC structure became effective in 2Q13, resulting in lower tax structure and MI. 

QoQ, 2Q13 PBT was up 7% to RM221m while core earnings were higher by 94% for similar reasons mentioned above. We observed some weakness in its retail space where operating profit declined by 14% and we believe this could be due to lag-times in lease renewals. On a positive note, MO’s operating profit rose 124% on the back of better F&B revenue after its ball rooms were refurbished. Furthermore, they enjoyed stronger management service income for managing KLCC REIT assets, hence boosting PBT margins by 3.4ppt to 69.9%. 

Outlook    There were expectations of the REIT-ing of Suria KLCC (60% owned). However, we believe there may be indefinite delays due to Suria KLCC’s shareholding structure while the current volatile bond and equity markets are deterrents. 

Change to Forecasts    No changes to estimates.  

Rating  Maintain MARKET PERFORM

In line with our sector call. 

Valuation     Lowering our TP to RM6.12 (RM6.48 previously) as we increase our FY14E target dividend yield to 5.1% from 4.7% to reflect the weaker 10-year MGS yields and lower market risk appetite (refer overleaf). 

Risks    Upsides to valuations and earnings include REIT-ing of Suria KLCC and stronger than expected MO performance. Downsides include weaker MO contributions and further 10-year MGS yield expansions.

OTHER POINTS Lowering our TP to RM6.12 (RM6.48 previously). We are looking to raise our MREIT valuation target base line i.e. the 10-year MGS from current 3.5% to 3.9%. Hence, our FY14E target dividend yield is raised to 5.1% from 4.7%, assuming that KLCCSS commands the same spread of +1.2ppt to our new target 10-year MGS. The rationale for the higher 10-year MGS target is due to the current volatile economic environment in the ASEAN region which has  caused bond-yields to unwind sharply. We will be imposing this on our other MREITs (CMMT, Sunway REIT and Axis REIT) under coverage in our upcoming MREIT sector report but expect the sector call to remain as NEUTRAL. Note that many of these MREITs are highly institutionalized, which helps to limit downside risks.

* Note 1:  1Q13 included RM11m one-off costs. If we strip-off 1Q13 one-off costs, 2Q13 PBT would have only risen by 4% QoQ to RM221m.

Source: Kenanga