1Q16 core earnings of RM172m met our (24.4%) and market (23.5%) expectations. 1Q16 NDPS of 8.03 sen was within, making up 23.0% of our FY16E NDPS of 34.9 sen. Earnings forecasts are maintained. The company recently renewed its shareholders’ approval (13th April 2016) for a 10% placement which could potentially raise between RM1.2-1.3b, which is valid for 12 months, but the group is still on the lookout for potential assets. We make no changes to our MARKET PERFORM call and TP of RM7.42.

1Q16 within our expectations at 24.4%. 1Q16 realized distributable income (RDI) of RM172m came in within consensus and our estimates at 23.5% and 24.4%, respectively. 1Q16 GDPS of 8.60 sen (2.85 sen single tier dividend plus 5.75 sen subject to 10% withholding tax), implies a net DPS of 8.03 sen which makes up 23% of our FY16E NDPS of 34.9 sen Maintaining stable YoY growth. RDI was down QoQ by 1%, attributable mostly to weaker topline (-4%) due to: (i) the hotel segment, likely from seasonality factors, and (ii) management services segment, which historically tends to be the strongest in 4Q. As such, we are not overly concerned with QoQ weakness as main segments - office and retail remain stable. Evidently, KLCC continued to see YoY growth with RDI increasing by 8% on the back of stable topline growth (+2%) from mildly positive growth across all segments, while RDI got a boost from higher portion of distributable income of net profit (94% vs. 89% in 1Q15). KLCC’s balance sheet remains healthy with a gross gearing of 0.21x.

Outlook. KLCC recently renewed its shareholders’ approval during the AGM on 13th Apr-2016 to issue up to 10% placement, which is valid for 12 months and could raise funds of between RM1.2b to RM1.3b. Going forward, management indicated 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 (refer overleaf). Note that we make no changes to our FY16- 17E earnings of RM705-752m.

Maintain MARKET PERFORM and TP of RM7.42, which is based on an unchanged target gross/net yield of 5.0%/4.7% on FY16E GDPS/NDPS of 37.1 sen/34.9 sen on a +1.2ppt to our 10-year MGS target of 3.80%. Since its FY16E net yield of 4.7% (gross: 5.0%) is already lower than sizeable MREIT peers’ average of 5.2% (gross: 5.7%), 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 rerating catalyst. Downside risks to our call include; (i) bond yield expansions, (ii) flattish to negative rental reversions, and (iii) weaker than expected occupancy rates. 

Source: Kenanga Research - 9 May 2016