Period

3Q15/9M15

Actual vs. Expectations

9M15 realized distributable income (RDI) of RM468m came in broadly within our and consensus expectations, making up 67% and 68% of consensus and our full-year estimates, respectively. Both Revenue and PBT came in within expectations, but RDI was slightly below as non-cash adjustments were wider than expected. However, we expect it to normalise in 4Q15.

Dividends

3Q15 GDPS of 8.15 sen (2.80 sen single tier dividend plus 5.35 sen subject to 10% withholding tax), implies a net DPS of 23.2 sen which makes up 68% of our FY15E NDPS of 33.9 sen (4.8% yield).

Key Results Highlights

QoQ, topline increased by only 2% to RM337m mainly due to an increase in hotel revenue (+30%) driven by the F&B segment and post MOKL’s refurbishment. However, slightly higher financing cost (+2%), coupled with higher taxation (+9%) and MI (+1%) dragged down RDI by 8% to RM147m. There was also a decline in fair value adjustment of RM32m due to the closure of City Point podium.

Ytd-YoY, topline was down by 1% primarily due to: (i) hotel segment (-19%) due to renovations, which have been completed in 2Q15, and overall weaker market conditions, and (ii) office segment (-1%) due to the closure of City Point, Kompleks Dayabumi. However, lower financing cost (-22%), taxation (-12%) and MI (- 2%) allowed RDI to increase marginally by 1% to RM468m.

Outlook

The group has renewed its shareholders’ approval during the AGM on 16-Apr-2015 to issue up to 10% placement, which should raise funds of between RM1.1b to RM1.2b. Going forward, management indicates that they are still on the lookout for potential assets, but so far nothing concrete has materialised. Potential assets are: (i) the remaining stake in Suria KLCC not owned (only 60% owned), (ii) assets under the parent, (KLCC Convention Centre, Traders Hotel and Impiana Hotel), and (iii) third party assets within the Golden Triangle.

Change to Forecasts

We make no changes to FY15 -16E earnings.

Rating

Maintain MARKET PERFORM

Valuation

We make no changes to our call and TP of RM7.13, which is based on an unchanged target gross/net yield of 5.20%/5.00% on average FY16E GDPS/NDPS of 37.1 sen/34.9 sen on a +1.2ppt to our 10-year MGS target of 4.0%.

Since its FY16E net yield of 5.0% is already lower than sizeable MREIT peers’ average of 5.6%, we think upsides are limited at this juncture. However, we believe KLCC deserves a MARKET PERFORM due to its asset stability, i.e. minimal risk exposure, and low gearing, while any clarity on acquisition pipeline will be a positive re-rating catalyst.

Risks to Our Call

(i) Bond yield expansions, (ii) Flattish to negative rental reversions, (iii) Weak occupancy rates.

Source: Kenanga Research - 12 Nov 2015