Period  3Q14/9M14

Actual vs. Expectations 9M14 realized distributable income (RDI) of RM464m came in within expectations, making up 70% of consensus and 73% of our full-year estimates.

Dividends  3Q14 DPS of 8.19 sen declared (3.05 sen single tier dividend plus 5.14 sen subject to 10% withholding tax), based on a 98% payout on RDI, implying net DPS of 7.68 sen. So, 9M14 NDPS is 23.4 sen or 74% of our FY14E NDPS of 31.6 sen (4.7% yield).

Key Results Highlights QoQ, RDI of RM151m grew marginally by 2%. Topline was very flat considering that retail contribution grew slightly (+2%) while its hotel division registered QoQ weakness (-3%). However, PBT margin was relatively better at 69.7% (+8.5ppt) as financing cost had normalized post last quarter’s one-off refinancing costs.

 Ytd-YoY, 9M14 topline grew by 6% while PBT was up by 4%. Growth was mainly driven by: (i) 8% growth in retail PBT thanks to higher rental reversions, (ii) strong recovery in the hotel PBT division (+14%) from commencement of non-room revenue generation post refurbishments of its ballrooms. However, financing cost went up by 25% due to the reasons above. RDI rose by 20% as the stapled REIT structure was only effective in 2Q14, which results in a better tax structure.

Outlook  The group has obtained shareholders’ approval in 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 will be used for potential asset acquisitions within KL’s Golden Triangle (GT). Potential assets are: (i) the remaining 40% stake in Suria KLCC not owned, (ii) assets under the parent, (such as KLCC Convention Centre, Traders Hotel and Impiana Hotel), and (iii) third party assets within the GT.

 Our checks with management indicate that they are still on the look-out for potential assets, but so far nothing concrete has materialised as yet. This is not a surprise to us as the asset acquisition environment is challenging, even though KLCCSS has a lower acquisition hurdle rate to overcome.

Change to Forecasts We make no changes to FY14-15E earnings.

Rating Maintain MARKET PERFORM

Valuation  Maintain TP of RM6.90 based on an unchanged target gross/net yield of 5.00%/4.72% on average FY15E GDPS/NDPS of 34.5 sen/32.6 sen. Our target gross yield is based on +1.20ppt to our 10-year MGS target of 3.80%. We see limited upside at this juncture considering that its current FY15E net yield of 4.8% is already slightly lower than sizeable MREIT peers’ average of 5.3%.

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

Source: Kenanga