Period

4Q15/FY15

Actual vs. Expectations

FY15 realized distributable income (RDI) of RM641m came in below consensus expectation but only slightly below ours, at 91% and 94%, respectively. Revenue came in well within expectations, but RDI was slightly below due to higher-than-expected taxation and minority interest contribution.

Dividends

4Q15 GDPS of 9.82 sen (4.13 sen single tier dividend plus 5.69 sen subject to 10% withholding tax), implies a net DPS of 32.5 sen (4.7% yield) which made up 96% of our FY15E NDPS of 33.9 sen.

FY15 NDPS is inline due to higher-than-expected effective distribution rate of 97% vs. our estimate of 95%.

Key Results Highlights

QoQ, topline increased by only 3% to RM347m mainly due to an increase in retail revenue (+4%) on higher rental rates effective 4Q15, and provision of management services (+20%) from additional services for facility management. However, higher contribution from associate (+65%) and interest income (+5%) contributed to the increase in RDI by 18% to RM173m.

YoY, topline was down by 1% primarily due to: (i) office segment (-2%) likely due to the closure of City Point, Kompleks Dayabumi, and (ii) hotel segment (-82%) due to renovations, which have been completed in 2Q15, and overall weaker market conditions. However, lower financing cost (-17%), higher interest income (+21%), and lower taxation (-5%) resulted in flattish RDI at RM641m. There was also an increase in fair value adjustment of RM578m on revaluation of most assets.

Outlook

The group has renewed its shareholders’ approval during the AGM on 16-Apr-2015 to issue up to 10% placement, which could 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 our FY16E earnings and introduce FY17E.

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 5.3% is already lower than sizeable MREIT peers’ average of 6.1%, we believe strong upsides are limited at this juncture. However, KLCC deserves a MARKET PERFORM due to its asset stability, i.e. minimal risk exposure, and low gearing, while any clarity on its 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 - 22 Jan 2016