Period  1Q14

Actual vs. Expectations 1Q14 realized distributable income (RDI) of RM164m came in within expectations, making up 24% of consensus’ FY14E RNI and 26% of ours.

Dividends  1Q14 NDPS of 8.16 sen (comprising of 3.73 sen single tier dividend and 4.92 sen dividend subject to 10% withholding tax) was also within expectations as it accounted for 26% of our FY14E NDPS of 31.4 sen (4.9% yield).

Key Results Highlights

 QoQ, topline came in higher by 3% driven by: (i) retail (+10%) on the back of higher rental reversions, (ii) hotel (+10%) on its ballroom facilities being reopened post renovation. However, RDI was marginally lower (-1%) given less interest income (-9%) and a sharp 36% reduction in share of associates (Menara Maxis). Reported net profit was lower by 51% as last quarter saw revaluation gains while there was none this quarter.

 YoY, topline was up by 10% due to similar reasons mentioned above and a 41% increase in management services as contributions from managing KLCC REIT only came in from May-13 onwards. RDI grew 87% due to the stapled REIT structure being effective from 2Q13, which resulted in lower taxation structure.

Outlook  The group has obtained its shareholders’ approval during the recent AGM (17-Apr) for up to 10% placement, which should raise funds of between RM1.1b-RM1.2b. It was mentioned in the media that it would be used for potential asset acquisitions within KL’s Golden Triangle (GT). Potential assets are: (i) the remaining stake of Suria KLCC not owned (only 60% owned currently), (ii) assets under the parent, (KLCC Convention Centre, Traders Hotel and Impiana Hotel, and (iii) third party assets within the GT.

Change to Forecasts    Raised FY14-15E RDI by 0.7%-1.2% as the group is refinancing a significant portion of their debt, which results in lower financing rates (refer overleaf).

Rating Upgrade to MARKET PERFORM (from UP)

Valuation  Higher TP of RM6.55 from RM5.93 (refer overleaf). We believe investors may hold on to the stock in anticipation of new asset acquisitions. However, other MREITs under our coverage provides higher gross yields of 6.3%-6.5% (net yields: 5.6%-5.8%) vs. KLCCSS and thus, we believe upsides may be capped until the asset acquisition takes place.

Risks to Our Call  Upsides include asset injections and yield expansions. Downsides risks include weaker hotel earnings and expansion in the 10-yr MGS.

OTHER POINTS

Refinancing efforts. The first issuance of its RM3.0b Sukuk Murabahah programme of RM1.56b has recently been  ssued, which will be mainly used for refinancing of existing debt. The tenure of the issue is between 3-10 years at profit rates of 3.90%-4.80%. This makes-up 69% of total debt. Currently, the group’s effective financing rate is 5.4% (based on annualized 1Q14). We expect financing cost to drop by 6%-10% for FY14-15E, prompting us to increase our FY14-15E RDI estimates by 0.7%-1.2%.

Higher TP of RM6.55 (from RM5.93) based on lower target gross/net yield of 5.20% / 4.90% on average FY14-15E GDPS/NDPS of 34.0 sen / 31.6 sen. We are lowering our 10-year MGS target to 4.00% from 4.15% as the market has factored in a lot of negatives like potential OPR hikes and tapering of US QEs. We will be extending this to our MREITs under our coverage during our upcoming strategy note. We have also reduced KLCCSS gross spreads to the 10-year MGS to +1.20ppt from +1.80ppt to reflect historical low yield spread levels due to news-flow on potential asset acquisitions. As a result, our target gross/net yields have been reduced to 5.20% / 4.90%. Our previous TP of

RM5.93 was based on target gross/net yield of 5.95% / 5.61% on average FY14-15E NDPS. Thus, we upgrade KLCCSS to MARKET PERFORM from UNDERPERFORM given total returns of 6.5%. We believe investors may hold on to the stock in anticipation of new asset acquisitions. However, other MREITs under our coverage provides higher gross yields of 6.3%-6.5% (net yields: 5.6%-5.8%) vs. KLCCSS and thus, we believe upsides may be capped until the asset acquisition takes place.

Source: Kenanga