Period  3Q13 / 9M13

Actual vs. Expectations 9M13 core earnings of RM452m are in line with expectations, making up 78% of street’s and 74% of our estimates. Corresponding realized distributable income (RDI) of RM387m is also within our expectations as it accounted for 74% of estimates.

Dividends  3Q13 DPS of 8.28 sen (including 4.86 sen from KLCC REIT, which is subjected to withholding tax) or 95% payout of distributable income is in line with our assumptions. Hence, 9M13 NDPS of 19.45 sen (c. 94% payout) made up 74% of our distributable income estimates, which is within expectations.

Key Results Highlights  YoY, 9M13 PBT fell by 67% to RM651m. However, excluding fair value adjustments, PBT rose by 15% to RM651m 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 18% decline in Mandarin Oriental’s (MO) PBT as we reckon occupancy rates and nonroom revenues were affected by the general election and refurbishments. RDI rose 39% because the KLCCSS structure became effective in 2Q13, resulting in lower tax structure and MI.

 QoQ, 3Q13 core earnings fell 5% to RM178m largely due to normalization of taxation as the previous quarter saw RM26m positive deferred taxation arising from KLCCSS structure becoming effective. However, 3Q13 RDI rose 11% to RM157m on the back of higher management service (+19%) and slight improvements in its retail (+3%) contributions which more than negated MO’s (-10%) weaker performances.

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 also deterrents.

Change to Forecasts No changes to estimates.

Rating Maintain UNDERPERFORM In line with our sector call as at current levels, KLCCSS yields of 4.1%-4.8% for FY13-14E are not as compelling as other sizeable MREITs, which are offering 5.0%-5.5% yields.

Valuation  Maintain TP of RM6.12 based on FY14E target dividend yield of 5.1% or a +1.2ppt spread to CY14E 10-yr MGS of 3.9%.

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

Source: Kenanga