We attended KLCC’s 2H15 results briefing last Friday and came away feeling neutral on its prospect. While the retail segment is doing well from positive reversions, and the office segment stable, the hotel segment remains a drag on topline (-1% Ytd-YoY). There are no visible acquisition targets as yet, with the 10% placement mandate valid up to April-16. We lowered our occupancy assumption to 55% (from 65%) in FY16 at Mandarin Oriental (MOKL) to account for the weakness in demand but also lowered the finance cost estimate closer to current levels of 4.9% (from 5.8%). All in, we leave FY16-17E earnings unchanged. Maintain MARKET PERFORM and TP of RM7.13, based on FY16E GDPS/NDPS of 37.1 sen/34.9 sen on an unchanged +1.2ppt to our 10-year MGS target of 4.0%. While we like the stock for its prime asset positioning and operational stability, upsides are limited as the FY16E net dividend yield of 5.3% is less compelling vs. sizeable peers’ average of 6.1%.

Flattish topline growth from a sluggish hospitality segment. The Office segment was stable given its long-term leases and triple-net-lease (TNL), but declined slightly (-1% YoY) due to closure of City Point podium. Retail saw positive revenue growth (+3% YoY) and will continue to do so from strong reversions and occupancy at Suria KLCC. However, the Hotel segment declined (-15% YoY revenue) due to ongoing AEI in 1H15 and overall weaker market demand. Going forward, we believe the hospitality segment may be challenging due to slow-down in business and corporate events, increased competition (i.e. Four Seasons and St Regis) and room renovations from 2Q16. Hence, we lowered our hotel occupancy assumption to 55% in FY16E (from 65% previously, vs. 48%in FY15). (refer overleaf) Status update on Phase 3 of Menara Dayabumi. To date, the group has completed the demolition of City Point podium and commenced the substructure works. Meanwhile, the conversion of atrium spaces of levels 2, 3 and 4 of Menara Dayabumi into offices are in progress and due for completion in 1Q16, which we have already accounted for in FY16E (refer overleaf).

Strong acquisition capabilities.The group renewed its 10% placement mandate at the AGM in 16-Apr-2015 which will only be valid up to April-2016. The placement is meant to raise funds of RM1.1b-RM1.2b for a potential asset acquisition and it may target assets within KL’s Golden Triangle (refer overleaf).

FY16-17E earnings unchanged at RM705-752m. We are lowering our topline by 2.1% to RM1376m to account for weaknesses at MOKL, lowering our occupancy forecast to 55% (from 65%) on anticipation of a weaker FY16E, and leaving FY17E unchanged at 68% for now. However, we have also lowered financing cost to 4.9% (from 5.8%) in FY16E, closer to current rates (4.5%) as 85% of debt is on fixed rate borrowings, while FY17E financing rates are already at 4.7%. All in, our bottomline is unchanged at RM705-752m for FY16-17E.

MaintainMARKETPERFORM andTP of RM7.13. 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 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. Risk to our call include lower than expected segmental occupancy. 

Source: Kenanga Research - 26 Jan 2016